The underlying theme of this cycle was to challenge preconceptions about how people around the world use Bitcoin. New behaviors are emerging, and other cultures are using the asset in ways that break previously established patterns.
A key trend emerging from this chaotic environment is the resurgence of the seedless security model, which takes a fundamentally different approach to securing Bitcoin private keys. Supporters argue that established security practices are increasingly failing to meet the expectations of many users. The maturation of custody alternatives, along with the emergence of ETF products, raises concerns about the potential for future users to engage in more complex self-custody solutions.
This isn’t the first time security experts have pointed to the seed phrase when asked whether Bitcoin’s own storage is having trouble bridging the gap. Industry veteran Jameson Robb has long argued about the difficulty of the security model, and remains outspoken about its pitfalls. His company, multi-signature wallet provider Casa, was founded in part to address the problems posed by traditional backup methods.
In a conversation with Bitcoin Magazine, current Casa CEO Nick Neuman echoed his colleagues’ concerns.
“we Because the user experience of receiving a seed phrase when first setting up a wallet is so challenging, we need to think more carefully about how we will use it in the industry..”
The dangers of seed phrases
Despite the significant improvement in quality of Bitcoin products and applications, the self-custody landscape remains dangerous for those whose comfort with technology is limited to the iPhone. Every other day, there are stories of successful phishing attacks targeting victims’ funds by compromising the seed phrase of their wallets.
In early January, popular hardware wallet provider Trezor announced that it had reason to believe that a third-party service provider’s systems had been compromised, exposing sensitive customer information. In the months since, X number of users have reported receiving new phishing attempts in their inboxes.
Another reminder of how vulnerable the average person’s security practices are came in 2022 after a security exploit affected the popular password manager LastPass.
After a series of strange wallet leaks that affected both mobile and hardware wallet users, researchers eventually discovered that the seed phrases stored on the service’s servers had been compromised. As of a few months ago, it was estimated that over $250 million in various cryptocurrencies had been lost.
While popular Bitcoin influencers are pounding the table for more robust security systems, including hardware wallets, many market participants are yet to embrace the practice. Shehzan Maredia, founder of Bitcoin financial services firm Lava, sees a significant gap between security product developers and the larger portion of the Bitcoin market.
“I realized that most people start to question their self-storage capabilities once you include hardware wallets and seed phrases. Half of them won’t be able to follow the instructions very well, and the other half will simply prefer to use a custodian,” he said.
Security experts say private key material should always be kept offline, but Maredia suggests that the secure protections present in modern phones are sufficient to thwart most attacks affecting users today.
“If you look at the common causes of user fund loss, it’s rare to find cases where mobile keys have been compromised,” he says. Rather, he argues that it’s more likely that users are not properly protecting their seed phrase backups or that they provide their seed phrase backups during phishing attacks.
Seedless Challenges and Opportunities
Since Casa pioneered the seedless wallet approach years ago, Bitcoin products have seen many improvements, but few have followed in the company’s footsteps. Self-customization applications are more powerful than ever, but some of the changes have introduced additional steps to an already significant learning curve. It’s worth questioning whether a nihilistic attitude toward security has relegated the practice to the status of a ritual that is unpalatable to the average person.
Neuman remains optimistic. He suggests there has been a noticeable shift in the industry toward a more realistic approach, but he thinks Bitcoin products are lagging.
“There are still quite a few wallets that force you to save (your seed phrase) up front. I think it’s a risk management issue on their part, but it really defeats the purpose of helping users feel comfortable keeping their keys safe.”
Nevertheless, this trend suggests that the rest of the industry is changing its stance on the risks users face when handling sensitive information. Recent technologies, such as Passkey, implemented in Coinbase’s new “smart wallet,” offer an interesting alternative to this new generation of products. Passkey is a new standard being pushed by internet giants like Apple and Google that aims to replace traditional passwords with cryptographic keys tied to a user’s device and identity.
According to our research, early adopters have testified that the technology has yet to address critical standardization issues. Lava’s Maredia agrees that there is room for improvement. He recently launched a seedless solution that he believes achieves the best security tradeoff that can be expected on mobile devices.
Lava Vault is heavily inspired by an older contribution from former Spiral developer Tankred Hase called Photon SDK. Photon implements seedless cloud backups similar to Casa’s early mobile key wallet implementation, but while fully open source, it has not been maintained for some time. Maredia is confident that the 2-of-2 solution applied in the ecosystem’s original design is resistant to most known attacks.
“I looked at things like Passkey, but I don’t think they’re made for protecting sensitive key material like Bitcoin. They’re basically just exchanging sensitive information with other stuff and are usually stored in a password manager. In reality, most password managers don’t do a good job of handling this, and it’s also pretty easy to delete from iCloud.”
Lava protects your seed phrase using a high entropy key stored on a separate server. Once encrypted, the seed is stored in a special directory in the user’s cloud that can help prevent accidental deletion or malicious access. The user authenticates with a key server that enforces rate limits using a four-digit PIN of their choice. Lava does not require you to create an account to protect your personal information on the service and its servers. For routine operations, the wallet uses a different key stored in a secure enclave on your device.
“There is no single point of failure, as even if a party accesses the encrypted information, they must know the encryption key. Users who forget their PIN can set up a PIN recovery method, allowing them to change their PIN after a 30-day delay.”
Maredia expects security protocols to evolve based on user needs and different risk profiles. Wallet policies such as 2FA, withdrawal or spending limits, and allowed addresses are already in place. “Lava Smart Key is a very flexible solution,” he explains. “Users can easily upgrade their own storage settings and accommodate users with specific needs.”
Seedless backups have been criticized for exposing individuals to undue third-party risk, but open-source implementations like the Photon SDK and Lava’s Vault model suggest that more vendors and service providers could implement similar standards to mitigate this problem.
While seed phrases remain a critical component of the security stack, two entrepreneurs consulted for this article believe it’s essential to abstract them away from most future users.
“In general, I think seed phrases are a very useful tool for making it easier to move keys between wallets, as well as providing an exit option in case something goes wrong with the wallet software you’re using,” says Casa CEO Nick Neuman.
Casa pursues a multi-signature scheme that incorporates hardware devices to eliminate single points of failure, but insists on adhering to seedless principles wherever possible.
“Wallet software is built to manage private keys. Humans are not built to manage private keys. So we have to leave that to the wallet.”
Source: Bitcoin Magazine