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My understanding is that:

  1. Your crypto is on the public ledger under a public key.
  2. Your Hardware Wallet stores your private key (which is used to prove your ownership of the public key/wallet).
  3. You create a password to protect your hardware wallet (something more easily remembered than a full private key hash).

What I don't understand, is that when creating a hardware wallet you're given a "recovery phrase" of 12 words you have to write down to recover your wallet if it gets lost.

How is this any different than just writing down your private key on the same piece of paper and foregoing the expensive wallet? If you have to write down what is essentially your private key anyway what exactly is the benefit/point of a hardware wallet?

4 Answers 4

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The private key can be created from the recovery phrase.

The advantage of a recovery phrase is that people are less likely to mis-type familiar words than to mis-type a long meaningless mix of digits and letters.

None of this depends on the wallet being a hardware wallet. Some software wallets, which can be obtained at zero cost, also support the use of recovery phrases (AKA seed-phrases).

The advantage of a hardware wallet is that, properly used, it is immune to typical PC malware.

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Your coins on the blockchain are not at a single address.

They are scattered around on dozens, over time on hundreds of addresses, seemingly randomly but in reality all derived from one Extended Master Private Key, aka the "BIP32 root"

which is in turn determined by the (numeric) Seed produced by BIP39

Which ultimately is derived from that mnemonic list + an optional passphrase of your choosing

Which together comprise your Seed Recovery Phrase.

With this SRP your wallet client derives ALL your key pairs and addresses, all Hierarchically Determined from that one Extended Master Private Key

you could have a dozen clients all set to the same master key, all will show the same info.

With the public master, they are Watch Only.

The private key is only required for spending.

All a hardware wallet (keychain) does is sign transactions, prevent others from seeing the private key.

You must keep the SRP safe, ideally engraved on stainless steel plates, the secure passphrase separate from the mnemonic

in multiple locations where no one will ever be able to see them.

All wallets can be lost or destroyed including hardware, and so long as you have the SRP - and no one else does - you can still access your assets stored on the blockchain.

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If you want just one address, then writing down the private key for it works.

This was how Bitcoin worked in the beginning, wallets would generate 100 private keys for 100 addresses for you at a time.

But soon this caused problems, for example, your initial backup would not get the 101st address, as it was generated later.

The solution that stands til today is called deterministically hierarchical wallets. In plain English that means you have just one private key (Master private key) from which you can generate addresses endlessly, but in a standardized fashion. And not just Bitcoin keys, hardware wallets allow you to have keys/addresses on other chains too; while a single Master Key backs everything up.

That master key, you guessed it, is standardized to be displayed as 12 or 24 words, to make it easy on humans.

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How is this any different than just writing down your private key on the same piece of paper and foregoing the expensive wallet?

With a hardware wallet you can sign transactions without the private key leaving the hardware wallet. To construct and broadcast transactions you need to create signatures using the private key.

If you have to write down what is essentially your private key anyway what exactly is the benefit/point of a hardware wallet?

You don't need to write it down. The hardware wallet is all you need to store a private key and sign transactions. However if you lose your hardware wallet or it gets corrupted you may be thankful you have a backup. There is no way to access or transfer your funds in the case that you lose your hardware wallet and you have no backup.

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