A private key is a string of numbers, letters, or a combination of both used to operate your blockchain address. They are similar to bank account passwords.
Every blockchain has a different format for a private key which is usually a long list with 256 characters.
Easy Explanation for Beginners
Imagine you have a special digital safe that holds your cryptocurrency. This safe has a unique code that only you know. This code is called a private key, and it’s what you use to access your crypto, send it to others, or use it in any transaction.
In the world of cryptocurrency, a private key is like the password to your digital wallet. When you create a wallet, it generates a private key and a public key:
- The Private Key: This is your secret code and should never be shared with anyone.
- The Public Key: This is linked to your private key, and it helps others identify you when they send you crypto. It’s safe to share your public key, which creates your “wallet address.”
Example: Think of your wallet address (made from your public key) like your bank account number that you give to people who want to send you money. But your private key is like the password to your online bank account—you keep it secure and private!
Technical Definition
A private key is a randomly generated, unique code used in cryptocurrency to control access to funds within a digital wallet. When you get a private key, you are essentially the sole owner of the cryptocurrency tied to it even if it might not be yours.
A private key works in tandem with a public key. The public key is derived from the private key and, in turn, generates a wallet address. While the wallet address can be shared publicly, the private key should always remain confidential.
This dual usage of Public and Private Keys together is called Asymmetric Cryptography.
Working
Private keys are based on a cryptographic method called asymmetric cryptography. This method uses two types of keys, a public, and a private key, to secure and manage digital assets.
When a wallet is created, a random private key is generated, which in turn generates a corresponding public key through mathematical functions.
To make it easy for people to remember, the private key is derived from a set of 12 to 24-word phrases called Seed Phrase or Key Phrase. When these phrases are hashed with a cryptographic function, they yield the private keys.
The public key is shared to receive assets, while the private key remains secret and is used to access or transfer those assets. A wallet address is derived from the public key and serves as the unique identifier where users can send cryptocurrency.
Common Ways to Store Private Keys
All of us have two ways of storing our crypto wallet keys. Both of them have their benefits as well as shortcomings.
Hot Wallets
Hot wallets are software that keep your private keys secure inside them. These wallets can be installed on mobile devices and desktop applications.
These can also exist as wallets on exchanges (CEX Wallets). In this case, private keys are not shared with the user. In the past after the fall of a few exchanges and the loss suffered by their users, the phrase ‘Not Your Keys, Not Your Crypto”, was popular and referred to these exchanges.
Hot wallets are more convenient to use and can be quickly opened for usage. However, their constant connection with the internet (via mobile/pc) keeps them at the risk of being hacked.
Cold Wallets
Cold wallets are air-gapped hardware devices that capture your private keys and only expose them when you need them for crypto transactions. There are basically three types of cold wallets:
- Hardware Wallets:
- Deep Storage (Crypto Vaults):
- Paper Wallets:
Advanced Ways to Secure Private Keys
As the cryptocurrency space evolves, so do methods to enhance private key security. Following are a few advanced tools you can use to ensure greater safety.
Multi-Signature Wallets
Multi-signature (multi-sig) wallets use multiple private keys for transaction approval, which improves security for individuals or organizations needing extra protection. These wallets are usually used by big crypto projects, treasury management in dApps and DeFi, and exchanges.
However, there have been cases like the WazirX hack where even multi-signature wallets were drained of funds.
Threshold Signatures
This technology divides a private key into multiple shares, which require a majority to authorize a transaction. It’s commonly used by custodial solutions for institutions such as Coinbase Custody which is used by Cboe-based Bitcoin ETFs.
Social Recovery Wallets
These wallets allow users to appoint “guardians” who can help recover lost private keys, making crypto more user-friendly without compromising security.
The upcoming Account Abstraction feature in Ethereum is expected to introduce this feature for the entire Ethereum ecosystem.
Risks Associated with Private Keys
- Hacking and Phishing: Cybercriminals use hacking and phishing techniques to access users’ private keys and steal funds.
- Key Loss: If a private key is lost, the assets tied to it are unrecoverable. Blockchains are decentralized, so there’s no central authority to reset or restore lost keys.
- Malware and Social Engineering: Attackers may use malware or deceive users into revealing private keys, particularly if keys are stored insecurely online or in unencrypted formats.
Private Key Safety Management
If you are a beginner, it is best to keep your investments small and inside exchanges where even if you forget the password, you can restore it. However, in the case of custodial wallets, you are fully responsible for keeping your crypto safe.
- Use Hardware Wallets: Store private keys offline with a hardware wallet to significantly reduce hacking risks. Wallets that are easily available are the Ledger Nano series, Ellipal, and Trezor.
- Keep Backups: Secure backups ensure you can retrieve your funds if the original key is lost. Store backups in a secure physical location, like a safe or lockbox.
- Never Share Your Private Key: Treat your private key like a password—never share it with others, and avoid storing it online or on a device connected to the internet.
- Use Multi-Signature Wallets: Multi-signature wallets require multiple keys to authorize a transaction, providing an extra layer of security. However, these are not suitable for individuals.
- Practice Secure Storage: Encrypt private keys if stored on a device, and avoid leaving copies in easily accessible places.
Adopting these practices can greatly reduce the chances of loss or theft of private keys.
