As we celebrate the 10th anniversary of the first hardware wallet, it’s amazing to see how far Bitcoin security has come. From the early days of secure storage to the game-changing creation of the Trezor Model One, this revolution has revolutionized the way we protect our digital assets. As we are ten years behind this experience, we should re-examine the challenges of Bitcoin’s early escrow, the significant impact of the first hardware wallet, the important role of escrow in today’s Bitcoin environment, and the new developments that continue to shape the future of crypto security.
An Origin Story
It all started in 2011 when Marek “Slush” Palatinus logged into his mining server and discovered that 3,000 BTC were missing. A mining pool is a group of miners who pool their computing resources to increase their chances of successfully mining Bitcoin blocks. Slushpool, now known as Brains Pool, was the first mining pool in the Bitcoin community, founded in 2010.
The incident highlighted an important issue: even tech-savvy Bitcoin enthusiasts can be victims of cyber attacks. At the time, securing and managing Bitcoin was a complex task, which involved storing private keys on a computer. However, finding information on a computer is difficult; these sophisticated machines are vulnerable to many threats that allow thieves to steal the private keys that control Bitcoin. The hack that cost Palatinus 3,000 BTC was a reminder of these early risks.
Realizing the pressing need for a simple, stand-alone machine that could securely store Bitcoin, Slush, along with Pavol “Stick” Rusnák, set out to build the world’s first wallet. Their idea was to develop an offline computer specifically designed to securely store Bitcoin and make it accessible to non-technical users. The concept was straightforward but flexible: a small, single-purpose device that could store private keys in an isolated location, protected from cyber threats.
Before Hardware Wallets
Before hardware wallets became widely available, users had to rely on software wallets installed on computers or smartphones, which exposed them to a variety of security threats. Malware infections and other attacks were common. Paper bags were considered more secure but still required a computer to create the bag. More secure methods, such as using air-gapped computers for cold storage, required significant technology, and these methods lacked a sufficient level of security for large amounts of Bitcoin.
The usability of early Bitcoin wallets was also a significant problem, with opaque connections and complex backup procedures. Many users have failed to back up their wallets properly, resulting in permanent loss of funds if the device is lost or damaged. Users were often unaware of backup best practices, and the lack of standard backup methods increased the risk. A major advance in caching came with the introduction of Hierarchical Deterministic (HD) Wallets by BIP32 in 2012, allowing easy and reliable caching support. Despite these advances, there was still a lack of simple and user-friendly options for newcomers. In short, the era before Hardware Wallets was marked by major security and usability challenges, making Bitcoin ownership a complex and risky endeavor.
The First Hardware Wallet
In the years leading up to 2014, various efforts were made to develop simple, single-purpose devices for storing cryptocurrency. However, these efforts failed to gain traction or meet the required safety standards. Realizing the need for a robust solution, Slush and Stick monitored the landscape for two years before deciding to create their own hardware wallet.
In 2014, they released the Trezor Model One. This device was the first hardware wallet, featuring a user-friendly design, random private key generation, and the ability to easily sign payments completely offline. In addition, it used the BIP39 standard, a new standard created by the creators of Trezor to create a copy of the wallet using a list of 24 characters representing private keys, which is a standard accepted by many wallets and familiar to anyone who has deposited their Bitcoin with a private person. maintenance.
When the user first connects the device, it guides them through the setup process to create a new wallet. The device generates a recovery seed, which represents a human-readable version of the wallet’s master private key and enables recovery of the wallet if the device malfunctions. The user is instructed to write down this list of names on paper, ensure that the wallet is backed up, and the private keys remain offline.
This onboarding process ensures that users back up and keep it secure. The user-friendly design offers advanced security, making hardware wallets accessible to both beginners and experienced users.
The Open Source Advantage
An important feature of Bitcoin is its commitment to open source principles, which is why the founders of Trezor adhered to the same principles when developing the Trezor Model One. This method has been adopted by most manufacturers in the industry. Open source software allows the public to test and verify system integrity. This transparency ensures that potential risks can be identified and addressed quickly and allows for the development of a global community. The first hardware wallet was open source, and many in the industry have embraced this approach to transparency, emphasizing the Bitcoin ethos, “Don’t trust; verify.”
The Importance of Self-Control
Throughout the life of Bitcoin, we have seen many crypto exchanges and custodians collapse or experience serious security breaches, which shows the importance of holding your private keys. The mantra “not your keys, not your coins” emphasizes that trusting third-party institutions means trusting someone else with your assets, which can lead to serious problems if the exchange is hacked, mismanaged, or faces legal issues.
The incident at Mt. Gox in 2014, one of the first and most notable exchanges, saw the loss of 850,000 Bitcoins, which were worth hundreds of millions of dollars at the time. This catastrophic failure was due to both hacking and mismanagement, leaving users unable to recover their funds. Bitfinex also experienced a significant hack in 2016, which resulted in the theft of approximately 120,000 Bitcoins. QuadrigaCX in 2019 saw users lose access to their funds after the sudden death of its founder, who was the sole holder of the keys to the exchange’s wallets. Cryptopia has faced debilitating hacks in 2019, while Binance, the largest cryptocurrency exchange by volume, has also experienced breaches and faces increasing regulatory scrutiny. More recently, the collapse of FTX in 2022 has further strengthened the risks of entrusting assets to central companies. All in all, mismanagement and fraudulent activities have led to the loss of billions, affecting countless users and shaking confidence in centralized exchanges.
By using hardware wallets, people can achieve true financial freedom, keeping their digital assets safe from the vulnerability of trusted custodians.
The Changing Landscape of Hardware Wallets
Over the past decade, the hardware wallet industry has grown exponentially, with many companies offering a variety of products and features to meet different needs. User interfaces now range from simple button-based navigation to touch screens and full keyboards. Many devices now support multiple cryptocurrencies, while others focus only on Bitcoin. This list of devices caters to both beginners and advanced users, ensuring that everyone can find a suitable option.
Another development has been the inclusion of secure devices—special chips designed to protect devices from physical attacks. However, all security products currently available in the market are closed source, which raises obvious concerns. To address this problem, companies like Tropic Square are actively working on developing secure open source tools to improve trust and security.
Another important development in the industry is aimed at improving the security and robustness of wallet backups. Techniques like Shamir’s secret sharing, Multisignature Wallets, and SeedXOR allow users to remove a single point of failure, making it more difficult for thieves to compromise a wallet.
Looking ahead, we can expect further improvements in hardware wallet security and usability. Another notable development is the widespread implementation of a new advanced standard, SLIP39, which uses Shamir’s Secret Sharing. This method has become more popular than the traditional BIP39 standard due to its improved security and user friendliness. With SLIP39, users start with a single list of names to back up their wallet and can later upgrade to a “stolen” backup with multiple shares. This approach provides a more flexible and secure solution, making advanced security measures more accessible and usable for a wider range of users.
Looking Ahead to the Next Decade
As we celebrate the first Hardware Wallet, it is clear that this evolution has fundamentally changed the security of cryptocurrency. From humble beginnings as a hobby project to becoming a trusted name in the industry, Trezor has pioneered innovative methods that have empowered more people to take control of their financial future. The journey from the first prototypes to the complex machines we use today is a testament to the vision and dedication of the Trezor team.
With the continued evolution of Hardware Wallet functionality and commitment to security and transparency, the future looks promising. As we look ahead to the next decade, the industry remains committed to protecting and innovating Bitcoin’s security and usability, ensuring that holdings are increasingly accessible and secure for everyone.
This is a guest post by Josef Tetek. The opinions expressed are entirely their own and do not reflect those of BTC Inc or Bitcoin Magazine.