Seed Phrases: Everything to Know

By  Beluga Research July 7, 2023

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Summary

  • A seed phrase is a set of words that is used to generate a private key
  • Seed phrases are used to recover a lost or stolen private key
  • A seed phrase may also be referred to as a recovery phrase, a backup phrase or a mnemonic phrase.
  • Seed phrases enable a user to create multiple wallets

Overview

A seed phrase, also known as a recovery phrase or mnemonic phrase, is a crucial element used to secure and recover cryptocurrency wallets. It consists of a series of 12-24 randomly generated words that act as a backup for the wallet's private keys.

When a user creates a new cryptocurrency wallet, they are provided with a unique seed phrase. This seed phrase serves as a master key to access and restore the wallet and all the cryptocurrencies associated with it.

It is essential to keep the seed phrase safe and private, as anyone who gains access to it can control the wallet and its funds. Storing the seed phrase securely offline, such as on paper, in a safe deposit box or a hardware wallet, is recommended to prevent the risk of theft or loss.

A Brief History

The Bitcoin Improvement Proposal 39 (BIP 39) introduced the concept of seed phrases in 2013. This proposal introduced a standard way to generate mnemonic phrases to recover private keys. The idea was to come up with a set of easy-to-remember words to generate a private key.

Since then, seed phrases have become a standard feature for many cryptocurrency wallets. Users in the cryptocurrency community also used their private seed phrases to create new wallets or recover lost funds if needed.

What is a Seed Phrase?

A seed phrase is a set of 12, 18, or 24 words used to generate a private key. Some wallets use a different number of words. A wallet randomly generates a seed phrase when the user creates the wallet. The wallet chooses the words in a seed phrase from a predefined list of words. The words are combined in a specific order to create the seed phrase.

A seed phrase is generated via a process called mnemonic code. Mnemonic code is a way of encoding data into a set of words that can be easily remembered.

After a seed phrase has been generated, it is used to generate private keys. The private keys are generated via a process called deterministic key generation. This process can generate multiple private keys from a single seed phrase. The beauty of a single seed phrase is that it makes it easy for an user to manage multiple wallets.

A user who loses their private key can enter their seed phrase into a wallet to recover the lost key. They can also enter their seed phrase into a wallet if the seed phrase is stolen. This is how seed phrases help keep cryptocurrency holdings secure.

A Cautionary Tale

One cautionary tale involving the importance of securely storing a seed phrase is the case of James Howells, a British IT worker and Bitcoin enthusiast. In 2013, Howells accidentally threw away a hard drive containing his Bitcoin wallet's private keys and seed phrase.

At that time, Howells had mined around 7,500 Bitcoins, which were worth relatively little (approximately $225 million US as of July 2023).

Realizing his mistake, Howells attempted to recover the hard drive from a landfill site in Wales where he believed it had been disposed of. Despite offering a substantial reward and seeking permission from the local council, he was unsuccessful in finding the hard drive.

Howells' valuable cryptocurrency fortune was lost forever due to the accidental disposal of the seed phrase. This unfortunate story underscores the importance of storing seed phrases securely, preferably offline and away from potential accidents, to avoid irreversible loss of access to cryptocurrency funds. Proper backup procedures and robust security measures are essential for protecting valuable assets in the world of cryptocurrencies.

Getting Started

  • Secure a cryptocurrency wallet. When a user creates a new wallet, the software application prompts them to write down their seed phrase on paper and store it in a safe place. A user should not store their seed phrase on a computer or another digital device. This makes their cryptocurrency wallets vulnerable to hacking or theft.
  • Recover a lost or stolen wallet. The seed phrase is the only way to recover one or more cryptocurrency wallets if the user misplaces their password or device.
  • Secure multiple wallets . One seed phrase can protect multiple cryptocurrency wallets.

Unique Aspects

  • Easy to remember. Although a seed phrase is composed of random words, the software for the wallet identifies words and puts them in an order that is easy to remember. The seed phrase needs to be easy to remember because it is the user's only way to recover a lost or stolen wallet.
  • Designed to be secure. The combination of words is difficult to replicate or guess even if a bad actor has access to the paper.
  • Useful to recover a lost or stolen wallet. An investor can use a seed phrase on any device or software that supports the cryptocurrency that was lost or stolen. If the investor loses a device or their wallet software becomes obsolete, they can still recover the wallet with the seed phrase. They should only use the seed phrase on a trusted device or software application. Using a seed phrase on an untrusted device or software can compromise the security of the wallet.
  • Can be used to create multiple wallets. A seed phrase is essentially a master key that can be used to generate multiple private keys. Each of the private keys corresponds to a different wallet address. A seed phrase allows a user to access a range of cryptocurrencies or create multiple wallets for different purposes.

Advantages

  • Security. Seed phrases provide an added layer of security to cryptocurrency holdings. They act as a backup to a private key which could be lost or stolen. If a user loses their private key, they can use a seed phrase to recover their cryptocurrency holdings.
  • Convenience. Seed phrases are easy to use and can be stored in a secure location. A user can memorize their seed phrase or write it down and safely store it on a piece of a paper.
  • Compatibility. Seed phrases are compatible with most cryptocurrency wallets. A user can use the same seed phrase with multiple wallets. This simplifies management of cryptocurrency holdings.
  • Recovery. An investor who loses their cryptocurrency wallet can use their seed phrase to recover their cryptocurrency holdings. This makes it easy to recover cryptocurrency in case of an emergency or unforeseen circumstances.

Disadvantages

  • Security. While seed phrases provide an added layer of security, they can be a security risk. If someone gains access to a seed phrase, they can use it to access protected cryptocurrency holdings. This is why it is important to store a seed phrase in a secure location.
  • Human Error. Seed phrases are typically 12 to 24 words in length. A string this long can be difficult to remember. The length of a seed phrase can lead to errors such as writing down the wrong words or forgetting a word. If this happens, a user may not be able to access their cryptocurrency holdings.
  • Physical Damage. If a user stores their seed phrase on paper, the paper can be damaged or get destroyed. For example, the paper with the seed phrase could get wet, molded, torn, shredded or burnt. If this occurs, the user may not be able to access their cryptocurrency holdings.
  • Recovery. While seed phrases can be used to recover cryptocurrency holdings, there is no guarantee the user will be able to recover all of their cryptocurrency holdings. This is because some wallets may not support all types of cryptocurrency.