Why Do Crypto Wallets Use Recovery Phrases?

In the world of crypto, a seed phrase (also called a recovery phrase) may be the most crucial piece of information you can retain. If your computer or hardware wallet is lost or stolen, your seed phrase may be the only way to regain access to your cryptocurrency. 

The same things that happen to computers and phones can also occur to hardware wallets, making them useless. If something terrible happens, you’ll be grateful you stored away that seed phrase.

Knowing What A Recovery or Seed Phrase Is

When you first create your cryptocurrency wallet, it will generate a string of random words called a “seed phrase” or Recovery Phrase that you can use to regain access to your cash in an emergency. There is a common misunderstanding that private keys, the alphanumeric sequences that allow users to conduct crypto transactions from their wallets, are the same as a recovery phrase. 

However, both must be protected with the same vigilance, as unauthorized users might easily duplicate the wallet or steal its contents if they gain access.

How does a Recovery Phrase Work?

Wallets for cryptocurrencies operate in a manner that is distinct from wallets for cash. To “live” with cryptocurrencies, blockchains, not crypto wallets, are required. Even in the event that you are unable to access your wallet, the blockchain will keep your funds secure.

How Can a Recovery Phrase be Generated?

New cryptocurrency wallets, whether hardware, software, or web-based, always begin with a seed phrase. Like many other top crypto wallets, it uses the BIP39 standard, a list of 2,048 English words that provide 128-bit encryption. The words in the phrases are taken from this list. The typical length for a seed phrase is 12 words, and some wallets use 24.

Why is it Called a “Seed” Phrase?

When everything is set up correctly, a seed phrase will generate a user’s private master key. This key, in turn, can create the user’s other private keys. The words that make up a seed phrase correspond to strings of random digits called a seed. It is common practice to locate the option to recover a wallet using the seed phrase within the wallet’s settings. For the recovery to be successful, the words must be entered in the same order in which they were provided.

The Importance of Using Recovery Phrases in Crypto Wallets

When compared to traditional passwords, recovery phrases offer a variety of benefits, including the following:

  • They are not generated by the user but rather by the wallet software, which removes any chance of the user reusing a password.
  • Because of their random nature, even the most powerful computers have a more challenging time cracking them.
  • Because the company that creates or hosts the wallet does not record transactions, the likelihood of them being hacked is extremely low.

However, despite these improvements to account security, there is a significant risk. Recovery phrases cannot be recovered, which means that if you forget the phrase, you will be permanently locked out of your wallet. This is a considerable risk.

The Problem with Passwords

Most people have terrible password hygiene. This means they use simple and basic passwords (e.g., password123), reuse passwords throughout apps, or use very subtle variants of the same password (e.g., password1234, password567, etc.). This puts users at risk because it’s trivial for hackers to gain access to all apps on a user’s smartphone if they can breach one password.

How do Crypto Wallets’ Recovery Phrases Generate Strong Passwords?

To prevent this, crypto wallets generate a random recovery phrase that can be used for signing transactions and proving ownership of a wallet address, recovering a wallet if it is lost or damaged (hardware wallets), or regaining access to your wallet if the device you use to access it is lost, stolen, or inaccessible (in case of software wallets). This variability in the recovery words makes them extremely difficult to decipher.

The Difference between Passwords and Recovery Phrases

Unlike passwords, recovery phrases cannot be recovered. If you lose the recovery phrase you receive when you create your wallet, you can’t access it. The crypto wallet manufacturer cannot help you find it. They cannot access information because it is not on their servers.

In What Ways Can a Recovery Phrase be Safely Stored?

Recovery phrase security solutions differ depending on how much crypto you have and how much you value security vs. convenience.

  • Splitting a recovery phrase between safe deposit boxes into several locations ensures redundancy in the event of a disaster. It’s inconvenient.
  • Specialized services engrave recovery phrases into stainless steel.
  • The mobile version of Coinbase Wallet (not the main Coinbase app you use to buy or sell crypto) lets you opt-in to the encrypted Google Drive or iCloud recover-phrase backup option, which keeps an encrypted version of your recovery phrase in the cloud. Back up your recovery phrase offline.
  • Your recovery phrase is your crypto. You can enter your recovery phrase into another wallet if you lose a hardware wallet or break a phone with a software wallet.

Is it Possible to Crack Seed Phrases?

A seed word can only be hacked by human error, such as storing it in a Google Doc or desktop text file. If your seed phrase is written or in a steel wallet, only you can access it until someone takes it. However, there are several viruses or phishing tactics meant to mislead a person into exposing their seed phrase, so you should be skeptical if someone asks for it.

Summary: Recovery Phrases in Crypto Wallets Are Secure, But Avoid Risks 

If you use a recovery phrase, you, your cryptocurrency, and your wallet are all safe from harm. They have utilized practically every cryptocurrency wallet because they are much more secure than regular passwords. Users who misplace this phrase will quickly learn that the feature that makes them so valuable — their resistance to cracking and theft — may also cause them a great deal of trouble.