Crypto Academy

The DFX Crypto Academy: get all the relevant background info on money, Bitcoin and DeFi.

“Not your keys, not your coins” – what’s behind that (seed) phrase?

Holding decentralized currencies and depending on third parties to do so? We are not the only ones who find this contradictory. The crypto wallets from help you keep control over your coins. The seed phrase plays a key role in this.

Why your keys and your independence are inseparable

The mantra “Not your keys, not your coins” perhaps sums up the crypto philosophy better than anything else. It motivated people like Satoshi Nakamoto, the enigmatic Bitcoin inventor, to create an alternative to the current financial and monetary system. His idea: only those who own the keys to their coins have full control and are therefore independent of third parties. Therefore, it contradicts the ethos of cryptocurrencies to entrust their custody completely to a third party, such as a central exchange.

This would create a dependency and serious problems could arise. The most obvious is the security risk of losing one’s money due to the hack of an exchange. The most famous cases are probably the hack of the bitcoin exchange Mt.Gox, which caused a total damage of over $660 million in 2014, and the implosion of the crypto exchange FTX, where secret speculative transactions were conducted with customer deposits. Even if you pay close attention to all security aspects, you can never 100% rule out a loss. Sudden upgrades or maintenance are always possible, so you can no longer get your coins and react to a volatile market.

These are just a few examples and aspects. However, there are also ways to buy cryptocurrencies directly into your own wallet for which you hold the keys – such as with wallets. With them, you can participate in the crypto market without having to trust a third party with the custody of your coins.

What is a Seed-Phrase?

A seed phrase (or private key) plays an important role in this process. This phrase is this “key”, the access to your wallet. When you create a new wallet, you receive this seed phrase. It allows you to access your wallet even after a crash or loss of your device. The BIP39 standard, which is encrypted with 128 bits and is used for many important cryptocurrencies as well as leading crypto wallets, has found the most widespread use so far. The fact that seed phrases usually comprise 12 or 24 English words can be traced back to this standard. They come from a list of a total of 2,048 words that were determined according to certain criteria.

For example, it was important to the developers that the words all differ in more than one character in order to minimize the risk of confusion. The words that make up the seed phrase are derived from a random sequence of digits, the actual seed. Similar to a password, you must enter these words in the correct order and, of course, spelled correctly to gain access to your wallet. When recovering your wallet, for example after losing your phone, you will be lucky to have these seed phrase words ready in the correct order. 🙂

How to protect your Seed-Phrase?

Wallets for which you hold the private key are called “non-custodial”. They offer you a high level of control and security. However, they also require a special sense of responsibility and caution. If you lose your seed phrase, there will be no one to recover it for you. There is no service hotline to call here. A seed phrase can best be compared to a master key. If you lose your PIN or hardware wallet, you can use it to regain access to your private keys.

To be clear, if you lose your seed phrase, you will never see your coins again. That is why it is so important to keep it safe. Basically, we recommend that you never store a seed phrase using an application or device that is connected to the Internet. That way, you don’t give hackers a chance. If you still want to save it digitally, you can use a document on a flash drive that only you can access offline. A simple sheet of paper is also a suitable medium, for example, if you keep it in a safe deposit box or together with other important documents.

However, a sheet of paper can be destroyed in the event of a fire. If you are storing large assets, it is safest to think about an indestructible way to store a seed, for example, embossing the seed phrase on a metal plate.

Go get a wallet!

However, the first step towards taking your finances into your own hands starts with downloading a wallet.

We recommend the DFX wallets for Bitcoin and DefiChain. Both are non-custodial, so you can safely buy and store coins and tokens here!

If you want to invest in tokens on Ethereum or the Binance Smart Chain, install MetaMask and use our new non-custodial DFX exchange.