When you start using a cryptocurrency hardware wallet, you get to write down a seed phrase in some physical medium (paper, metal, etc.) so you can regain access to your funds if you lose the hardware wallet.

If anyone who gains access to this seed phrase can regenerate your private keys in another wallet and get access to your funds, why use a hardware wallet in the first place? Why not just keep the seed phrase well hidden, remove your data from any wallet app and use the seed phrase to regenerate your keys anytime you need to transfer funds? Is it only a matter of convenience and security when actually transferring the funds?

up vote 3 down vote accepted

Well, in both cases, your seed words are ultimately the key to the wallet.

If you use a regular wallet, you open yourself up to a number of other attacks

  • Malware on the device that runs the software wallet
  • Keyloggers
  • People shoulder surfing
  • Backdoored wallet software

Moreover, larger OSes like Windows, Linux, and Mac OS have considerably larger attack vectors than a hardware wallet. Someone may gain access to your machine through some completely unrelated.

A hardware wallet not only minimizes the attack surface, it also makes use of secure elements (the good ones, anyways), which are specifically designed to prevent exfiltration of things like keys. Most computers do not have similar hardware.

Moreover, since the seed generation happens on the hardware wallet, the seed does not pass through a potentially compromised computer. Of course, one must trust that the hardware wallet is honest, which is why it is better to stick with reputable ones, such as Trezor and Ledger.

  • The idea would be to not keep any data in any wallet, just keep the seed phrase on a physical medium well hidden. That would reduce the time window for the attacks you mentioned to: - the moment the seed is generated until it is copied into the medium and deleted. - any time I use the seed to regenerate keys to access the funds and then delete all data again. Your point about the seed being generated in a safer environment is valid, though. As the fact that in normal cases using the hardware wallet instead of regenerating the keys every time I want to access the funds would be much safer. – Gehrard Raven Aug 1 at 13:50
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    But it increases the opportunities for a others. If I know you do that, all I need is a usb keylogger between your keyboard and your computer, and patience. The more often you type the seed, the more chances I have. – Raghav Sood Aug 1 at 13:51
  • In reality, there is no perfect solution. It's just that, currently, hardware wallets tend to have the fewest attack vectors, especially if you add a passphrase so your seed that you have memorised. Then, even with the seed, your wallet is inaccessible unless you give up the passphrase, which is also entered on device, and cannot be logged. – Raghav Sood Aug 1 at 13:59

With a hardware wallet, the physical signing of transactions is often done within the hardware wallet itself, as opposed to through a trusted website.

The hardware wallet keys never leave the device as it acts as a simple black box that takes in a request from the browser (or website) and returns a signed transaction. A paper wallet is also extremely safe, except that there's a small risk when the user eventually enters the seed phrase or private key directly onto the computer.

  • Agreed. The thing is that these hardware wallets are marketed as "secure storage for your cryptocoins", which is a bit misleading. Their advantage over a paper wallet seems to be in the safety of the keys generation and transactions only. So they should be marketed as "secure transactions for your cryptocoins". – Gehrard Raven Aug 1 at 20:14

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