September 30, 2020

The seed is your treasure as an investor in cryptcurrencies part 1

The seed is a set of words (usually 12 or 24) that allow us to easily back up our purse. Surely if you have worked with cold wallets, you have had to back up these words. It is usually recommended to write them down on paper, and not to store them in any device with an internet connection.

Very few people know the true potential behind this security standard, but when you really understand how it works, the security of your cryptocurrencies goes to another level.

Most users who have backed up their seed know that with those words they could recover the funds, but few really understand how this is made possible. In addition, as you will learn in these articles, it may have other interesting functions such as protecting you from extortion or simply resolving an inheritance.

To give an example, when we use a hardware wallet like Ledger device, and the seed is generated offline, there are people who may think that, if the company disappears, the application does not connect to its nodes and we cannot make transactions, so, we stop having access to our cryptocurrencies. Nothing could be further from the truth, as this security standard exists for this purpose and we will see it below.

Private keys or seeds? Before going into the functioning of the seed, let’s review something fundamental as it is the concept of private key of a wallet. The private key is mathematically related to an address that can be used publicly to receive funds. Let’s take an example with Bitcoin.

  • Public Address: 1Gt7rYMsJsSQgnfkH8EVQM53FQWc7dffQu
  • Private key: L5Y9LjHJ2GT4XEgytsZGjUp4sWcmbsPjTWRriHEaq1kPCvPYCjtp

We use the public address to receive funds, while the private key is where we can sign a transaction and send BTC. Therefore, having the private key “L5Y9LjHJ2GT4XEgytsZGjUp4sWcmbsPjTWRriHEaq1kPCvPYCjtp” guarantees access to and use of public management funds “1H4L9jkTgXuQcSthuddTAgEz2vh5CsbEvT”.

So, if I can have the backups of my private keys because I need a seed? When we use a multi-wallet or hardware wallet, we can have many different cryptocurrencies or even, several addresses of each one of them. Let’s imagine we have the following portfolio:

  • Bitcoin
  • Ethereum
  • Litecoin
  • Bitcoin Cash
  • Dash
  • Zcoin

In addition, from Bitcoin and Ethereum, we use 3 addresses of each cryptocurrency for different issues, so if we want to back up all the private keys we would have to save the following information:

  • BITCOIN 1: L5Y9LjHJ2GT4XEgytsZGjUp4sWcmbsPjTWRriHEaq1kPCvPYCjtp

  • BITCOIN 2: KxWvV1BcoShPJokjxegYpnh4x4mWZWujyuN5GNZp8L1gwzTyKJmW

  • BITCOIN 3: Kyir2vtitHCysKCSkgmv5UKiao2DcfCGQjHRCmveoBtqaERCVjo5

  • ETHEREUM 1: 0x1ccea8ea18aff14727aa4a209efcf1578446edbe7d27ea86ec6271782c46b0bb

  • ETHEREUM 2: 0xed7c3dbbb761821cc46ba9b8d08f598f36ed72fa5edf9fdd19671dcc5e70f2e7

  • ETHEREUM 3: 0x20fd17f54ddb09ef765e2cc636c2b6bf9fdc5d00c7bf02552c2b224648c9fb8c

  • LITECOIN: TB3jYmB46ePZJ3wLubpFbtoaMTPHFAKqcBsPXZqCHW8UGZo4YZFu

  • BITCOIN CASH: KwwauBtgFR5UfyTTxVt6e8ZV9oigiVNwsjZtoX6s9Q6ZN9cNw9XR

  • D-ASH: XJHjg9qfQiGt7hA4dYnCvUL76V5guJWBmo6ZJ4obzcpF5tuWHR9S

  • ZCOIN: YC1QrkVKfktr81sYnAEP19DFh4GSS5cjkhLgkrbGJ5A74Q2KFppV

And so for all the cryptocurrencies that we use and each of the addresses, so in which cases can become a real database, with the burden that represents this.

If we want to have it safely, one of the options is to write it down on a piece of paper. I think it is quite evident that many alphanumeric codes like the ones above, apart from being a tedious job, it is very easy to make a mistake in a character and lose access to some of the wallets. That is why the BIP 32,39, 44 and 43 security standard was created (the first three are the most used).

With a sequence of words (usually 12 or 24) perfectly readable by humans, you can do the algorithmic calculation and have thousands of private keys.

An example of a seed phrase:

camp myself eye rubber spy picnic business knife element hurdle snow virtual horror attract dragon protect spread pen squeeze copy enact giraffe occur fuel

With this seed you can calculate thousands of private keys of different cryptocurrencies, in fact, is the seed with which you can calculate the private keys described above.

Therefore, the advantages are clear:

  • Readable words for anyone, easy to write down on paper and back up, minimizing the risk of error.
  • Starting from the same seed, the directions of the cryptocurrencies to be operated are calculated without the need to constantly interact with the backup, thus reducing risks.
  • Even if Ledger device, Trezor, Exodus or the wallet you use disappears, with a mnemonic calculator, you can rescue your funds.

If you want to see different ways to rescue your funds from a seed, without depending on third parties visit the second part of the article.