Distributed Ledger. Does Ledger have access to your crypto? Why is there so much noise about upcoming Ledger service offering storing your seed in the cloud?
What is a Distributed Ledger?
A distributed ledger is a type of database that is consensually shared and synchronized across multiple sites, institutions, or geographies. It allows transactions to have public “witnesses,” thereby making a cyberattack more difficult. The main characteristics of a distributed ledger include:
- Decentralization: Unlike traditional databases where a central authority controls and maintains the data, a distributed ledger has no central data store or administration functionality. This decentralization can increase the security and transparency of the data.
- Transparency and Immutability: Most distributed ledgers are designed so that anyone with access can view all transactions, and once a transaction is entered, it cannot be erased. This makes the system highly transparent and secure against tampering.
- Consensus-Based: Transactions must be validated by consensus among participants in the network, not by a single authority. This consensus mechanism ensures that each transaction is verified and agreed upon by a majority of the nodes in the network.
- Reduced Counterparty Risk: Since all transactions are recorded on the distributed ledger and are immutable, it reduces the risk of fraudulent activities.
- Smart Contracts: Many distributed ledgers, like those based on blockchain technology, support smart contracts. These are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code.
Recently Distributed Ledger, a leading manufacturer of cryptocurrency hardware wallets announced a new service – “recover your keys using your identity”. The service will allow users to recover their cryptocurrency wallet seed in case of loss. The news made a lot of noise in the crypto & blockchain industry. To explain why, we must understand what is a “hardware wallet”.
The idea of cryptocurrency is to self-host. You, as a user, create a digital wallet, which allows you to manage the cryptocurrencies you “own”. What makes you “own” crypto is just a set of unique, cryptographically secured digital data. This digital data, combined with special software, allows you to create a blockchain transaction, which means that you can send your crypto. As long as you own this unique “digital data” , you are the real owner of your crypto.
To create and send crypto transactions, people use special software, which is most often called a “cryptocurrency wallet”. In fact this software is responsible for storing your unique-digital-data, and using it when you create a transaction. Since unique-digital-data is used to control crypto, it’s crucial to protect it. If you use your smartphone or desktop wallet application – there is a chance that someone can steal unique-digital-data and take your crypto from you (by hacking you). They don’t need your wallet application, they only need unique-digital-data. It’s crucial to understand that exclusive access to crypto is not the wallet application by itself, but the unique-digital-data controlled by this application.
Hardware crypto wallets are some special devices that have one ultimate goal – securely storing your unique-digital-data. These minimalistic devices are designed to be impossible to hack. From a software and hardware point of view (secure element). They became very popular because it is almost impossible to hack it, even if a “hacker” takes your phone or desktop.
The main idea of a hardware wallet is that unique-digital-data NEVER leave the hardware wallet. Hardware wallet uses it to create transactions but shouldn’t allow to extract outside. Ledger service offers the storage of your unique-digital-data on 3th party storage. It will be encrypted, impossible to be used by anyone. But – it kind of breaks that main idea and purpose of hardware wallet which is the foundation of hardware wallet companies, including Ledger.
Ledger users can be almost 100% sure that their funds are still safe. Why almost? Since Ledger software is closed source, their honesty couldn’t be technically proven. And it’s not about their noisy service – the question mark over their legitimacy has been there for years. If you don’t trust them now, you shouldn’t trust them ever.
I design and build enterprise IT solutions based on blockchain technology.
I am blockchain architect in Trans.eu building ECMR (digital CMR Consignment Note) based on blockchain. I teachabout Bitcoin, blockchain and decentralization via Linkedin and blog: https://mobycrypt.com.