Safeguarding Your Assets (3/3): Practical Measures

Safeguarding Your Assets (3/3): Practical Measures

Author: George Yim

Managing Director, Crypto HK

The previous two articles discussed the custodial risks of centralised exchanges and the supply-chain vulnerabilities of relying on a single brand of hardware wallet. Entrusting your assets to someone else, or relying on a single device, is no longer sufficient. A more robust approach is to distribute control rather than switch to another brand.

One relatively accessible method is to add a custom passphrase to your recovery seed, commonly known as the “25th word.” This passphrase should not be written down on the same piece of paper as your recovery seed. Instead, memorise it or store it separately. Without the passphrase, even if your recovery seed is stolen, an attacker cannot access the actual wallet. I particularly recommend Trezor series as the setup process of the “25th word” is completed on the device itself, meaning you do not have to enter the passphrase on a computer. Its latest Safe 7 model also adopts post-quantum algorithms for its setup process and software verification, providing room for future upgrades in anticipation of advances in computing power. For the general public, this is currently one of the more accessible ways to strengthen asset security.

A more advanced approach is multisignature (multisig). This involves configuring an asset so that multiple keys must jointly authorise a transaction before funds can be transferred. For example, a transaction might require approval from two out of three keys. The key is to use hardware wallets from different brands for these keys and store them in separate locations. This way, even if one device is compromised or lost, the overall security of the arrangement remains intact. Industry professionals sometimes use multi-party computation (MPC) systems, which distribute the signing process across multiple nodes. It is rather complicated so I will not go into further detail here.

Some people still recommend outdated methods, believing that installing a hot wallet on a phone and then disconnecting it from the internet is sufficient to keep the assets offline. This does not work. Smartphone chips are designed for convenience and performance, not resistance to physical attacks. Following the US government's failed attempt to compel Apple to unlock an iPhone ten years ago, the digital forensics industry developed various tools capable of extracting data directly from phones. One example is Elcomsoft iOS Forensic Toolkit, which can extract data from iPhones. Recovering the contents of a lost phone is not particularly difficult. If the recovery seed or private keys are stored on the device, the assets are almost certain to be transferred out by an attacker.

Ultimately, protecting your assets comes down to having the right mechanisms in place: keep the passphrase separate from the recovery seed, distribute signing authority, and never store your only backup on a device that could be compromised. These principles will stand the test of time.