Do hardware wallets store the wallet.dat redundantly inside? If not, are there such hardware wallets?

Question

I'm baffled by how "cheap" the existing hardware wallets look and seem. They seem to have been made "at a budget", with no real high-end version available.

If I owned something like 1,000 BTC, or even 100 BTC, I would want a damn mini fortress of a metal cube full of security measures and like 100 different memories, all individually holding the wallet.dat (encrypted), physically separated from each other and with a hardware switch needed to be flicked on for them to even have any contact with the "main logic", and the entire cube to be fully fireproof and waterproof down to a 10,000 meters and able to withstand thousands of blows from a sledgehammer.

From what I can tell, these hardware wallets are just a single flash memory holding all my coins on it. They even tell you to back it up immediately... which seems to defeat the purpose of having a hardware wallet, if you have to store the wallet.dat redundantly anyway... in practice meaning it goes with all my other files which come into contact with my potentially compromised PC regularly.

I've really tried to research these hardware wallets, but all of them seem like a bad joke to me. I've only grown more and more skeptical to getting one, because my current (bad) system of storing my cold storage wallet.dat on multiple encrypted disks which DO regularly come into contact with my PC seems "just as good", if not better...

I hope I'm missing something, and that somebody can enlighten me.

Basically, how do rich Bitcoiners store their coins? Seriously? How? How do they sleep at night?

Answer 1

I hope I'm missing something, and that somebody can enlighten me.

As I expect you know, information-security can be described as a combination of confidentiality, integrity and availability.

You seem to be concentrating on availability, I believe the makers of hardware wallets are prioritising confidentiality.

If you have a hardware wallet, you are likely to want to also store copies of your recovery-phrase (AKA seed-phrase, backup-phrase) in other secure places e.g. stamped onto corrosion resistant metal plates in safes and/or safety-deposit boxes perhaps in multiple locations. That way, you don't lose availability if the hardware wallet is damaged, destroyed, lost or stolen.

If you keep your wallet.dat on encrypted flash drives, your confidential data is much more exposed than a hardware wallet. At some point the encryption layer decrypts the wallet.dat so that your wallet software can read and write to it. Your data is transferred into a potentially compromised environment with a comparatively large attack-surface. At that point it is probably accessible to malware or vulnerable to a maliciously altered wallet application. This is not the case with a hardware wallet - the secret keys are never accessible to any PC, they never leave the device.

Answer 2

Most wallets today are not merely a set of key pairs as they were originally stored in wallet.dat, but the keys are deterministically generated from a common root.

The generating process is described technically in BIP-32 (Hierarchical Deterministic Wallets). Using a fixed entropy, a master key is generated using a key derivation function, and from this, a tree of key pairs is generated with the same algorithm. There is no practical limit to the number of keys which can be generated from one master key.

Most wallets also use BIP-39 (Mnemonic Phrase) or similar. A random number is chosen and appended with a checksum, then split into 11-bit chunks, each of which represents the index of a word in a fixed dictionary of 2048 words. The words are listed in sequence and then hashed to generate the entropy for use in BIP-32.

This means you only need the set of words, known as the 'seed phrase,' to deterministically regenerate all of the private keys your wallet ever uses. As long as you back up this seed phrase, you can recover the wallet on another hardware device if one fails, and there is no danger of losing coins.

Bitcoin Core now supports BIP-32 and derivation paths for keys are included in the wallet.dat file.

Deterministic wallets ensure you will always have the private keys to recover funds in a P2PKH transaction, but P2SH transactions are a bit more difficult because they also require you to possess a redeem script. Increasingly, hardware wallets are supporting BIP-174 (Partially-Signed Bitcoin Transactions) which provides a common encoding for storing any data required to spend a transaction. This however, requires you to create backups as things such as the redeem script are not deterministically generated. Hardware Wallets such as the COLDCARD Mk3 usually come with multiple reliable microSD cards to back up everything required.

Answer 3

You don't store the backup on your PC. You write it down on a piece of paper using a pen. It's 12-24 random english words. The backup is there because most people lose coins not because of theft but because of mistakes they made like forgotten passwords/pins.

The only exception is coldcard. It generates an electrum wallet file and saves it to an SD card. You can choose to expose it to your regular PC or a different one dedicated for bitcoin use.

As for the HW itself it has a secure element that holds your seed/private keys and does the signing.