Smart wallets — are they safer than hardware wallets?

Smart wallets — are they safer than hardware wallets?

Written by

Savannah Lee

January 23, 2020

Cryptocurrency has been around for roughly a decade now. But teams are still developing and refining the best ways to store these digital assets…

Cryptocurrency has been around for roughly a decade now. But teams are still developing and refining the best ways to store these digital assets…

Wallet providers today face a number of challenges as they attempt to blend functionality, usability and security. These challenges are not so dissimilar to the ones faced by financial products and tools in a more traditional sense, such as new digital banks like Revolut and Venmo.

The DeFi industry has seen a continuous evolution of the technology and its numerous use cases as we search for product-market fit. In the past few years in particular, we have seen more sophisticated platforms and tools emerge, making the entire process a safe one.

Yet for new users in particular, storing tokens can be a confronting process, hindering mass adoption of cryptocurrencies. Over USD 1.7 billion worth of cryptocurrency has been lost or stolen since the start of 2017. This number mostly boils down to how that cryptocurrency was originally stored — insecurely.

Recoverable > Offline?

Paper wallets, exchanges, hardware and mobile wallets are the main ways you can store your crypto today. Your funds are linked to your wallet address and secured by a private key, which you should always aim to be in full control of.

We are going to compare hardware wallets and smart wallets.

The hardware wallet market in 2017 was worth USD 95 million. With this consistent trend, the market is expected to grow to over USD 300 million within the next 3 years.

Hardware wallets, such as the Trezor and Ledger devices, have a reputation for being the most secure. These small devices function like a USB, providing a safe way to store your private keys and the funds attached to them.

Your keys are encrypted within the device and kept totally offline until you need to manage or send some cryptocurrency. You can safely access your funds even on insecure computers. This limits any exposure to online threats and cybercrime.

Trezor operates on a Zero Trust approach, which advocates for multiple layers of security to minimise the ways it can be compromised by a third party. Trezor is only a single-purpose device; there are no apps or downloads available for the hardware that could potentially compromise security.

Because it’s a hardware wallet, Trezor must be plugged into a computer to make transactions, and often require some technical knowledge. This makes them less accessible for making everyday purchases.

Trezor is also trickier to use, as it is integrated into the MetaMask extension for the Chrome web browser. You must use MetaMask to check your account balances (for ETH and other tokens), sign transactions, manage your smart contracts and use dApps.

Ledger is built with a distinctive operating system called BOLOS, which is integrated into a secure chip inside its hardware. This EAL 5+ certified secure chip is the same one in your credit card or passport.

Ledger is a tamper-resistant platform capable of securely hosting applications and data. Hacking a secure chip takes a huge amount of effort, while information can be easily extracted from generic microcontrollers by amateurs. So far, Ledger has been the only player in the market to provide this technology.

Smarter = Safer?

However, despite being one of the most recommended ways to store your funds, hardware wallets do not have robust recovery features.

If you lose your device and your backup phrase, there is no way to restore your funds from your hardware wallet. If your private key is compromised — which unfortunately does happen — then you essentially have no option but to move your funds to a brand new wallet.

Smart wallets are arguably more secure. Your funds are stored in a smart contract which lives in the blockchain “cloud” and only accessed and managed by your mobile phone.

This separation of access (keys) and account (smart contract) is not only far more secure, but also multi-functional.

These contracts can be designed with safety mechanisms in place to make your funds as loss-proof as possible, while still ensuring you are in total control of your private keys at all times.

With a smart wallet, you can set up multiple accounts with their own unique addresses and private keys, set spending limits and freeze your funds.

Using our own Smart Wallet as an example, we designed our mobile app with an entirely end-to-end user experience in mind, starting from the first download.

If you wanted another layer of security, you could even use a hardware wallet, like Trezor or Ledger, to manage your smart wallet.

Pillar aims to enhance the overall usability and accessibility of cryptocurrencies in day-to-day life.

Your private keys are encrypted within the chip inside your mobile device, which would take an unimaginable amount of money, time and resources to crackSo while you can safely store your funds, you can also spend them with ease, something which common hardware wallets do not offer.