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If I understand correctly, one of the main perks of using a deterministic watch-only wallet is the ability to generate new receiving addresses without syncing with the offline wallet, but this seems vulnerable to attack.

Example:

  1. To prevent an attacker from stealing her funds, Alice keeps her private keys in an Armory offline wallet. She uses an [online] watching-only wallet to generate receiving addresses, which seems to be recommended by Armory's page Using Our Wallet:

    Now that the wallets are setup, you can use the watching-only wallet exactly the same way as a regular wallet, except Bitcoins cannot be sent from it. Use the “Receive Bitcoins” button to generate addresses for receiving payments, and incoming transactions will show up in the ledger with a slightly different color than your other wallets.

    A similar suggestion on the Electrum tutorials page:

    You now have an online wallet where you can check your balances and give out new addresses, but you can't however spend the coins. So if an attacker would be able take over your online computer your coins can't be lost.

  2. Eve creates a modified version of Armory in which all new receiving addresses (created when the user presses "Receive Bitcoins") are owned by Eve instead of Alice.

  3. Eve gains access to Alice's online computer and plants the modified version of Armory. Now any payments received by Alice's new addresses are actually under Eve's control, without her knowledge.

Obviously you could generate the receiving address a second time on the offline wallet and verify that they match, but doesn't that defeat the purpose? Also, shouldn't there be a warning about this?

  • This is a frequent and common flaw with most claimed security flaws: "Eve somehow gains access to Alice's online computer and... " Once an attacker has access to a victim's computer, they can do ANYTHING! Reformat the harddrive; install a new OS; copy all private keys. If the attack relies on a magical step of the attacker somehow gaining access to a protected resource, then it is not a real attack. – abelenky Nov 27 '17 at 16:47
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Yes, this is possible. However, since Bob (actually, in cryptography, usually Eve, the attacker) has, apparently, got access to Alice's computer, he/she could also replace the Bitcoin application with one that does the same thing.

The purpose of this procedure is to protect Alice's existing bitcoin. It does not do other things.

  • Fair enough, thanks for clarifying. Also, I'll change the attacker to "Eve" :) – CgodLEY Mar 14 '14 at 2:54

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