Convenience vs. Security: The Eternal Trade-off

Summary

The universe of cryptocurrencies has forever valued decentralization, security, and transparency as its cornerstones. Ledger, a company acclaimed for its hardware wallets, recently launched the 'Recover' service, raising several eyebrows in the process. This move has stirred unease among users, as it contradicts the principles of self-custody and trustless systems, fundamental to the crypto ecosystem. This article unravels the implications of Ledger's move, investigating its potential impact on the crypto landscape.

Ledger's Seed Backup Service and Its Implications

In a bid to democratize the world of cryptocurrencies, Ledger unleashed its 'Recover' service. This service offers Ledger users to backup their recovery seed online, using encrypted cloud services, and recover their seed through a KYC (Know Your Customer) ID based process.
To achieve this, the hardware wallet splits the recovery seed into encrypted shares, which are then exported from the device to the network. Then, when you need to recover the seed you go through an ID check and the shares get back into any brand new device before being decrypted and restored. This announcement has instigated apprehension among the crypto community, birthing new vulnerabilities and provoking debates around user privacy and security.

At the center of the crypto community discontent lies the alarming fact that contrary to what was said by Ledger in the past, the formerly impossible to extract seed can indeed be extracted from the device. This revelation strikes a severe blow to the trust Ledger has cultivated over the years. Although Ledger attempts to reassure users, the closed-source nature of their firmware inhibits independent verification. It's a pill that many in the crypto community find hard to swallow.

 

Shifting towards custodial services

The 'Recover' service is also a stride towards dependency on three third-party custodial services in charge of storing the seed: Ledger, CoinCover, and EscrowTech. Each custodian stores a shard of the split seed, and the recovery process is KYC-based, exposing users to potential privacy breaches. There is a looming possibility of government entities gaining access to these shards, a major departure from Ledger's promise of self-custody.
As the crypto security adage says: "Not your keys, not your coins."

Where is the master key to decrypt the shares ?

Critics argue that if the encrypted shares can be recovered on any brand new device, there must be a master key somewhere outside the device. This means that a user's seed could be decrypted without their consent or knowledge, stirring up concerns about ownership and control. This simple fact makes Ledger's Recover service a custodial service for which the user has to trust a third-party. For many in the crypto sphere, it's a deal-breaker.

Additional risks: KYC and manipulation

Additionally, the KYC process, while necessary for recovery identification, exposes users to multiple points of failure. These range from risks such as hacks, corrupted companies or government seizing crypto accounts as the companies may be legally forced to hand over the seed if requested.
Moreover, the seed recovery mechanism itself, pivoting on passport checks, could be susceptible to manipulation and hacks.

The Disturbing Shift in Ledger's Approach to Crypto Security

While Ledger's aims at simplifying the crypto experience for new users such as NFTs owners, gamers and the next wave of crypto adoption, the concerns about security and privacy are too significant to ignore.
The moment a seed connects to a network, it introduces potential points of failure, that's a fact. Hardware wallets are supposed to be designed to make it impossible to connect the seed to any network, but here it seems this promise is being compromised.

The way they did this transition towards their custodial seed recovery service is very disturbing for many crypto holders. They could have released a completely new and separate hardware wallet product for people more inclined to choose cloud based recovery services. But instead, they are spreading the new feature to all Nano X users (and soon all their products) through their new firmware update. Based on Ledger's statements about their devices, many users bought one thinking that the seed was impossible to extract. Today they are upset as they realise it was not the case.

Conclusion

Ultimately, the issue is not Ledger's decisions but the fact that users are involuntarily locked into these choices. The proprietary nature of Ledger's firmware, coupled with their new seed recovery service, undermines the "Don't trust, verify" ethos of transparency and verification. Perhaps, the ideal solution would be a completely separate, dedicated product with its own firmware, providing users with the autonomy to choose. But until then, let us remember that while treading the fine line between convenience and security, we should never compromise the core principles of 100% offline cold storage and self-custody.

If you find yourself needing help understanding how to securely hold your crypto in self-custody, feel free to reach out to our expert team at Hodlr, on the chat or by email. We're always here to help.