What is a seed phrase, and why is it important?

Meaning and importance of a seed phrase explained

As a seasoned cryptocurrency enthusiast and someone who has lost my fair share of digital fortunes to the abyss of forgotten seed phrases, let me share my hard-earned wisdom with you.

A seed phrase, often called a wallet recovery phrase, mnemonic phrase, or crypto seed phrase, is a set of 12 to 24 randomly selected words produced by your digital currency wallet.

The significance of a seed phrase lies in its ability to generate your private keys, which grant you entry to your cryptocurrency assets. In essence, a seed phrase serves as the master key to your digital wealth.

Essentially, a seed phrase serves as an understandable backup for your private keys, which are the essential cryptographic keys that manage your digital wallet and its assets. If you ever misplace your wallet (either physically or by forgetting the password), you can regain access to your crypto wallet by inputting your seed phrase into a compatible wallet application. Without it, recovering your wallet is nearly impossible and could result in losing your cryptocurrency.

In 2013, James Howells discarded a hard drive that contained the codes for his Bitcoin savings account. This hard drive had around 8,000 Bitcoins (worth approximately $859.7 million as of December 16) stored in it. Since he no longer has his Bitcoin recovery code, often referred to as a seed phrase, he cannot access his money which is now buried in a landfill. This incident emphasizes the importance of keeping your seed phrase secure.

A brief history of seed phrases

In 2012, hierarchical deterministic (HD) wallets ushered in the era of seed phrases, making digital wallets significantly more user-friendly by simplifying the management of private keys, which had previously been quite cumbersome.

Wallets for high-definition (HD) cryptocurrencies have simplified the process of creating and safeguarding your private keys through the introduction of recovery phrases, often called seed phrases. These phrases have since proven vital in the realm of digital currencies.

How seed phrases work

Seed phrases enable users to easily and securely back up private keys and manage their digital assets.

When setting up a digital wallet, it automatically produces a seed phrase based on BIP-39 (a Bitcoin enhancement proposal), starting with a sequence of randomly selected numbers, which are subsequently translated into words from a predetermined vocabulary list.

The selected terms offer a strong level of unpredictability, ideal for cryptography, while still being simple enough for recall.

After being created, this seed phrase serves as your guide; it enables you to recreate your private keys – the cryptographic keys that manage your cryptocurrencies. As an illustration, your seed phrase could resemble the following format:

castle ginger apple mystery spider clock mountain sky ocean

Every word within the seed phrase contributes to forming your personal key, which grants entry to your digital wallet. However, it’s the distinct nature of seed phrases that sets them apart: each combination of words serves as a single backup for all the words in your key, ensuring secure and easy recovery of your wallet’s contents.

A seed phrase is beneficial because it’s deterministic, which means you can recover your wallet and retrieve your funds regardless of the device or wallet app you use. It functions much like a digital key for your safety deposit box, working consistently across different locations.

Can a seed phrase be hacked?

A seed phrase itself can’t be hacked as it is a sequence of words that grants access to a digital wallet only when they are inputted in the proper sequence, not individually.

Regrettably, should your recovery phrase fall into the wrong hands—either via harmful software, fraudulent emails (phishing), or inadequate preservation—an unscrupulous individual could exploit it to gain entry and manage your digital currency wallet without your knowledge or consent.

Here are the ways a seed phrase could be compromised:

• Phishing attacks: Hackers can trick you into entering your seed phrase on a fake website or app.
• Insecure backups: Storing your seed phrase in easily accessible or online locations (like cloud storage or unencrypted text files) makes it vulnerable to hacking.
• Malware: If your device gets infected with malware, it might log your keystrokes or access files where your seed phrase is stored.
• Social engineering: Hackers might attempt to gain your trust and convince you to share your seed phrase under false pretenses, claiming they need it for support or troubleshooting.

What happens if you lose a seed phrase?

I’m sorry to say that if you misplace your seed phrase without any backup, it means there’s no method to retrieve your wallet. Consequently, the money associated with that wallet is considered permanently gone.

Let’s explore further the possible outcomes if you misplace your seed phrase and discuss when external assistance from service providers could potentially be useful.

• No recovery in case of non-custodial wallets: Non-custodial wallets like MetaMask don’t store any information for you. If you lose your seed phrase, you lose access to the wallet and there’s no way to recover it. This means you cannot regenerate your private keys, meaning you cannot access or recover your funds.
• Possibility of recovery through a provider in case of custodial wallets: In custodial wallets, a third-party provider (like Coinbase or Binance) holds control over your private keys. In the event you lose your seed phrase, the provider may help you recover your wallet using account credentials, email recovery or other forms of authentication. However, don’t forget: “Not your keys, not your crypto.”
• Third-party wallet recovery services: Some specialized third-party services may assist in wallet recovery. These services don’t usually recover wallets without seed phrases, but they can sometimes help with key recovery if you’ve backed up your seed phrase or private keys incorrectly. Many of these services are scam-prone, so remember to thoroughly test their genuineness.

How to safely store and back up your seed phrase

Keeping your wallet recovery phrase securely stored offline, such as in a hardware wallet, or dividing it across various spots are effective methods to safeguard and backup your seed phrase.

Here are some tips to ensure your cryptocurrency wallet security:

• Offline storage: Internet-connected devices expose your seed phrases to cyber threats, so store them as physical copies in a safe deposit box or fireproof safe or write them down on paper. The risks of online attacks can also be reduced by using hardware wallets. Still, these are commercialized devices whose security depends upon the measures taken by wallet providers.
• Multisignature wallets: A multisignature wallet requires multiple private keys (and, therefore, multiple seed phrases) to authorize a transaction. For example, you could store your seed phrase in multiple locations, and to perform any action (like sending crypto), you would need access to at least two or three of them, adding a level of redundancy and making it significantly harder for someone to access your wallet with just one stolen backup of your seed phrase.
• Geographical separation of backups: The risk of losing funds is further reduced by keeping your seed phrases in separate locations, such as a personal safe, a safety deposit box in a different city or country, or entrusting a trusted individual with a copy. This redundancy ensures access to your funds even in unforeseen circumstances or emergencies.
• Regularly test and update your backups: After safely storing your seed phrase, periodically review and update your backups. Documents might deteriorate over time, and you might discover that your backup is unreadable. To ensure everything is working properly, test your recovery process regularly by recovering your wallet from the seed phrase. Additionally, update your backups to reflect any changes if you replace your wallet or devices.
• Be cautious about sharing your recovery phrase: Never share your seed phrase with someone you don’t trust completely. If you are using a hardware wallet, not even the wallet provider should know it. Similarly, customer service representatives of legitimate products and services will never ask for your seed phrase. Thus, be careful, as phishing attacks can mimic wallet interfaces, tricking you into entering your seed phrase on malicious websites or apps.

Every approach offers multiple levels of safety, yet it may involve compromises on ease of use and risk assessment. Consequently, it’s essential to thoroughly investigate different methods to find one that matches your specific requirements.