By Dušanka Seratlić and Karina Rafaella

In crypto, you’ll often hear about how important it is to protect your seed phrase. 

A seed phrase consists of 12 to 24 simple words given to you when you first set up a crypto wallet. It acts as a key and a proof of ownership for all funds in your wallet. 

Your seed phrase is an integral part of how you transact using your crypto wallet. In this article, we’ll explain its role and significance and go through some basic concepts that explain how a crypto wallet works. 

Understanding Public and Private Keys

Every time you create a new crypto wallet, a private key and public key are automatically generated for you. These are two large numbers with a mutual relationship defined through asymmetric cryptography (also called public key cryptography). If you wanted, you could also generate these numbers yourself - but we will not go into that today.  

For blockchains like Bitcoin or Ethereum, a private key is a 256-bit number. But, what does the “256-bit” part mean? It means that your private key consists of 256 zeros and ones. This is a very large number that’s practically impossible for a human or current machines to guess.  

Once the private key is generated, the public key is created based on the private key through elliptic curve mathematics. We won’t go deep into this, but suffice to say that this method ensures your private key can never be guessed through your public key. 

As you can see, the neat functionality here is that asymmetric cryptography makes it so that the private key is used to generate the public key, but the public key cannot be used to reverse generate a private key. 

Public keys and private keys work as a pair to facilitate peer-to-peer transactions.

These keys allow you to send and receive crypto assets without the need for third-party verification. Using asymmetric cryptography to generate these keys also ensures security and transparency in a blockchain.

But, how do we use private and public keys in practice?

Crypto Wallets 101

In the traditional world, wallets typically hold cash, credit cards, and IDs. On the other hand, crypto wallets do not actually hold cryptocurrencies and NFTs. Instead, crypto wallets hold a pair of public and private keys. 

A crypto wallet is used to generate and store a pair of public and private keys: 

• Your public key is your address on the blockchain and can be shared with others. 

• Your private key is the only proof of ownership for your funds and must never be shared.

• Together, these keys are used to help you access, manage, and transfer your assets.

In addition to generating your keys, a crypto wallet has an interface that makes it easy to interact with the blockchain. You can use your wallet to view your balance, send and receive cryptocurrencies and NFTs, and connect to Web3-enabled applications. 

However, it’s important to make a distinction: your crypto wallet is merely a generator and an interface to the blockchain. Your cryptocurrencies and NFTs exist as a record on a blockchain, not in your wallet. It’s your keys that represent your ownership and allow you to manage your funds. 

Still, you’re likely never going to see or need your public and private keys - unless you choose to. These numbers are not very user-friendly and are difficult for people to remember, interpret, or work with. Instead, your pair of keys are hashed to generate your seed phrase, wallet addresses, and digital signatures. Hashing is a mathematical function used to encode and transform any value expressed through numbers or characters into a different value. 

Hashing is used for security and ease of use. Let’s see what that means.

A wallet address

Depending on the blockchain, your wallet address can be a hashed version of your public key, or the public key itself. For example, in Ethereum, your wallet address is your public key. In Bitcoin, a wallet address is generated from your public key. And, while you can have only one public key in your wallet, you can generate as many wallet addresses as you want based on that public key.

You will often share your wallet address when you want to receive funds on the blockchain. The wallet address functions in a similar way as your geographical address: you need to have it in order for the post office to find you and send you letters. With a crypto wallet address, blockchain users can initiate transactions that send funds to your wallet. 

Sharing your wallet address is not something to worry about. As mentioned above, it’s impossible to use your wallet address or a public key to guess your private key. But, you do need to keep your private key and its hashes safe. 

A seed phrase

A seed phrase is a hashed version of your private key. You usually do not handle your private key directly, since it is extremely long and difficult to read and remember. So, private keys are encoded in the form of a seed phrase or QR code.

A seed phrase is also referred to as a “secret recovery phase” or “backup phrase.” Depending on the wallet provider, a seed phrase usually consists of 12 to 24 simple words, which are chosen from a list of 2,048 words. The order in which the seed phrase is given to you matters, because mixing up the words will not give you access to your private keys.

A digital signature

So, a wallet address is used to receive funds and the seed phrase gives you access to your funds and proves your ownership. Your seed phrase is also needed when you have to recover a wallet. But, what is a digital signature?

A digital signature is used to prove you know your private key (and thus are the true owner of the funds), but without actually revealing your key. It’s a hash of your private key that verifies to the network you own the funds and can make transactions. For example, sometimes you need to “sign a transaction” when you use your wallet to buy, sell, or swap crypto or NFTs. When signing a transaction, your wallet generates a signature based on your private key to prove that you own that particular private-public key pair.

Different Types of Wallets

You must have heard about hot and cold wallets. What’s the difference? 

If you are using a hot wallet, such as Metamask or Coinbase Wallet, your private and public keys are generated and stored on your browser or mobile wallet app. 

If you are using a cold storage wallet, such as Ledger or Trezor, your private and public keys are generated and stored offline. 

You could also generate your own keys without any devices and then use the keys to access your funds through any wallet application. That’s possible because wallets made for a certain blockchain are inter-compatible - they use the same standard to generate seed phrases. 

Why You Should Never Share Your Seed Phrase

When you have a crypto wallet, what you actually hold is a private key. Since your private key is encoded in the form of a seed phrase, it is the most important component of your wallet. 

It is essential to protect your seed phrase at all costs because access to your seed phrase means access to ALL the crypto assets associated with your wallet. 

A seed phrase is not a typical password, so you never need to type it in anywhere or give it to anyone to confirm anything. 

The only time you will need your seed phrase is when you set up your wallet, i.e. generate your keys. At that time, write down your seed phrase on a piece of paper and store it somewhere safe. 

Another time you will need your seed phrase is if your computer dies, for example, and you need to install your wallet on another computer. In that case, your seed phrase will be used to restore your wallet on the new device. 

These are the only two times you might need to see or share your seed phrase. In any other case, do not share your seed phrase.

TLDR

1. You cannot reset your private key or seed phrase. If you forget or lose your seed phrase, you will lose access to your wallet and your funds. 

2. There is no real reason to give your seed phrase to anyone or enter it on a website. If you are purchasing or selling an NFT, connecting your wallet to a website or a token-gated Discord, giving anyone access to your seed phrase will result in you losing all your crypto assets.

3. The only time you will need your seed phrase is if you are restoring your wallet. If you’re setting up a new device, you need your seed phrase to install your wallet on the new device.

4. Keep your seed phrase in a secure location. It is best to keep it offline, and away from internet-connected devices. Scammers and hackers are finding more ways to gain access to seed phrases.

Conclusion

Owning a crypto wallet comes with the freedom to do more with your money, but it also comes with a greater responsibility of keeping your assets secure. Understanding why you need to protect your seed phrase will help you navigate the world of crypto safely. 

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