As we celebrate the 10th anniversary of the first physical wallet, it’s fascinating to see how far Bitcoin security has come. From the early days of fragile self-custody methods to the game-changing Trezor Model One, this revolution has changed the way we protect our digital assets. A decade later, it’s worth revisiting the challenges of early Bitcoin self-custody, the pivotal impact of the first physical wallet, the essential role of self-custody in today’s Bitcoin landscape, and the innovative developments that continue to shape the future of cryptocurrency security.
Origin story
It all started in 2011 when Marek “Slash” Palatinus logged into his mining pool server and discovered that 3,000 bitcoins were missing. A mining pool is a group of miners who pool their computing resources to increase their chances of successfully mining bitcoin blocks. The Slash pool, now known as the Brains pool, was the leading mining pool in the Bitcoin community, founded in 2010.
The incident highlighted an important issue: Even technically savvy Bitcoin enthusiasts could fall victim to cyberattacks. At the time, securing and managing Bitcoin was a daunting task, involving storing private keys on a computer. However, securing information on a computer is difficult; these complex devices are vulnerable to a number of threats that allow thieves to steal the private keys that control Bitcoin. The hack that cost Palatinus 3,000 Bitcoin served as a reminder of these early vulnerabilities.
Recognizing the urgent need for a simple, standalone device that could securely store Bitcoin, Slush, along with Pavol “Stick” Rusnak, set out to create the world’s first electronic wallet. Their vision was to develop an offline computer specifically designed to securely store Bitcoin and make it accessible to non-technical users. The concept was straightforward yet revolutionary: a small, single-purpose device that would store private keys in an isolated environment, protected from online threats.
Before the advent of hardware wallets
Before hardware wallets became widely available, users had to rely on software wallets installed on computers or smartphones, exposing them to a range of security threats. Malware and other attacks were common. Paper wallets were considered more secure but still required a computer to create the wallet. More secure methods, such as using isolated computers for cold storage, required significant technical expertise, and even these methods lacked sufficient security for larger amounts of bitcoin.
Usability of early Bitcoin wallets was also a major issue, with complex interfaces and complicated backup processes. Many users failed to back up their wallets properly, resulting in permanent loss of funds if the device was lost or damaged. Users were often unaware of backup best practices, and the lack of standardized backup methods increased the risks. A major improvement in standardization of backup standards came with the introduction of Hierarchical Deterministic (HD) wallets with BIP32 in 2012, allowing for easier and more reliable backups. Despite these advances, there was still a lack of easy-to-use and user-friendly options for newcomers. In short, the period leading up to hardware wallets was marked by significant security and usability challenges, making self-custody of Bitcoin a complex and risky endeavor.
First e-wallet
In the years leading up to 2014, various attempts were made to develop simple, single-purpose devices for storing cryptocurrencies. However, these efforts failed to gain traction or meet the necessary security standards. Realizing the need for a robust solution, Slush and Stick watched the scene for two years before finally deciding to create their own hardware wallet.
In 2014, they released the Trezor Model One. This device was the first-ever physical wallet, combining an easy-to-use design with truly random private key generation and the ability to easily sign transactions completely offline. Additionally, it implemented BIP39, a new standard created by Trezor’s creators for backing up wallets with a 24-word list of private keys, a standard that many wallets have adopted and is familiar to anyone who has ever put their Bitcoin in self-custody.
When the user first connects the device, it guides them through the setup process to create a new wallet. The device generates a recovery seed, which is a readable copy of the wallet’s master private key and enables the wallet to be recovered in the event of a device failure. The user is prompted to write this list of words on a piece of paper, ensuring that the wallet is backed up and the private keys remain offline.
This integration ensures that users create and maintain a secure backup. The user-friendly design provides advanced security, making hardware wallets accessible to both beginners and experienced users.
Open source advantage
One of the key aspects of Bitcoin is its commitment to open source principles, which is why Trezor’s founders adhered to the same principles when developing Trezor Model One. Most manufacturers in the industry have adopted this approach. Open source software allows the community to review and verify the integrity of the system. This transparency ensures that potential vulnerabilities can be identified and addressed immediately and allows for improvement by the global community. It was the first open source hardware wallet, and many in the industry have embraced this approach for transparency, emphasizing Bitcoin’s ethos, “Trust not; verify.”
The importance of self-guarding
Throughout the history of Bitcoin, we have seen numerous cryptocurrency exchanges collapse or suffer serious security breaches, demonstrating the importance of keeping your private keys. The slogan “Not your keys, not your coins” emphasizes that relying on third-party institutions means trusting someone else with your assets, which can lead to major problems if the exchange is hacked, mismanaged, or faces legal issues.
The Mt. Gox incident in 2014 was one of the earliest and most notable exchange collapses, which saw the loss of 850,000 bitcoins, worth hundreds of millions of dollars at the time. This catastrophic failure was due to both a hack and mismanagement, leaving users unable to recover their funds. Bitfinex also suffered a major hack in 2016, resulting in the theft of nearly 120,000 bitcoins. QuadrigaCX in 2019 saw users lose access to their funds after the sudden death of its founder, who was the only one who had the keys to the exchange’s wallets. Cryptopia suffered a devastating hack in 2019, and Binance, the largest cryptocurrency exchange by volume, has also experienced breaches and is facing increasing regulatory scrutiny. Most recently, the collapse of FTX in 2022 has reinforced the risks of entrusting assets to centralized entities. Overall, mismanagement and fraudulent activities have resulted in billions of dollars lost, impacting countless users and undermining confidence in centralized exchanges.
By using hardware wallets, individuals can achieve true financial independence, keeping their digital assets safe from vulnerabilities that trusted custodians might expose them to.
The Evolving Landscape of Physical Wallets
Over the past decade, the hardware wallet industry has expanded significantly, with many companies offering a variety of products and features to meet different needs. User interfaces now range from simple button-based navigation to full touchscreens and keyboards. Many devices now support multiple cryptocurrencies, while some focus exclusively on Bitcoin. This range of devices caters to both beginners and advanced users, ensuring that everyone can find a suitable option.
Another development in this area is the introduction of secure elements – specialized chips designed to protect devices from physical attacks. However, all secure elements currently available on the market are closed source, which raises concerns about transparency. To address this issue, companies like Tropic Square are actively developing open source secure elements to enhance trust and security.
Other important developments in the industry aim to enhance the security and robustness of wallet backups. Technologies like Shamir’s Secret Sharing, Multisignature Wallets, and SeedXOR allow users to eliminate single points of failure, making it significantly more difficult for thieves to hack the wallet.
Looking ahead, we can expect further improvements in hardware wallet security and usability. One notable development is the wider implementation of a new, enhanced standard, SLIP39, which uses Shamir secret sharing. This approach has become preferred over the traditional BIP39 standard due to its enhanced security and ease of use. With SLIP39, users start with a single list of words to back up their wallet and can later upgrade to a “sharded” backup with multiple shares. This approach provides a highly flexible and secure solution, making advanced security measures more accessible and practical for a wider range of users.
Looking forward to the next decade
As we celebrate the first digital wallet, it’s clear that this revolution has revolutionized cryptocurrency security. From humble beginnings as a hobby project to becoming a trusted name in the industry, Trezor has pioneered innovations that have empowered countless individuals to take control of their financial future. The journey from early prototypes to the cutting-edge devices we use today is a testament to the vision and dedication of the Trezor team.
With the continued evolution of hardware wallet functionality and a commitment to security and transparency, the future looks bright. As we look to the next decade, the industry remains committed to securing and innovating Bitcoin’s security and ease of use, and ensuring that self-custody becomes increasingly accessible and secure for all.
This is a guest post by our guest, Joseph Titic. The opinions expressed here are entirely his own and do not necessarily reflect the views of BTC Inc or Bitcoin Magazine.