As we celebrate the 10th anniversary of the first hardware wallet, it’s remarkable to see how far Bitcoin security has come. From the early days of precarious self-custody methods to the groundbreaking creation of the Trezor Model One, this revolution has transformed the way we protect our digital assets. With a decade of this experience under our belts, it’s worth re-examining the challenges of early Bitcoin self-custody, the fundamental impact of the first hardware wallet, the essential role of self-custody in the current Bitcoin landscape, and the innovative advancements that continue to shape the future of cryptocurrency security.
The story of origin
It all started in 2011, when Marek “Slush” Palatinus logged into his mining pool server and discovered that 3,000 BTC were missing. A mining pool is a collective of miners who combine their computational resources to increase their chances of successfully mining Bitcoin blocks. Slushpool, now known as Braiins Pool, was the pioneer mining pool in the Bitcoin community, established in 2010.
This incident highlighted a major problem: even tech-savvy Bitcoin enthusiasts could fall victim to online attacks. At the time, securing and managing Bitcoin was a daunting task that involved storing private keys on a computer. However, protecting information on a computer is difficult; these complex machines are vulnerable to many threats that allow thieves to steal private keys that control Bitcoin. The attack that cost Palatinus 3,000 BTC was a reminder of these early vulnerabilities.
Recognizing the pressing need for a simple, standalone device that could securely store bitcoins, Slush, along with Pavol “Stick” Rusnák, embarked on creating the world’s first hardware wallet. Their vision was to develop an offline computer specifically designed to securely store bitcoins and make them accessible to non-technical users. The concept was simple yet revolutionary: a small, single-purpose device that would store private keys in an isolated environment, protected from online threats.
Before hardware wallets
Before hardware wallets became widely available, users had to rely on software wallets installed on computers or smartphones, which exposed them to a number of security threats. Malware infections and other attacks were common. Paper wallets were considered more secure, but they still required a computer to create the wallet. More secure methods, such as using air-gapped computers for cold storage, required significant technical expertise, and even these methods lacked an adequate level of security for large amounts of Bitcoin.
The usability of early Bitcoin wallets was also a major issue, with clunky interfaces and complicated backup processes. Many users failed to back up their wallets properly, leading to permanent loss of funds if a device was lost or damaged. Users were frequently unaware of best practices for backups, and the lack of standardized backup methods further increased risk. A major improvement in backup standardization came with the introduction of hierarchical deterministic (HD) wallets using BIP32 in 2012, allowing for easier and more reliable backups. Despite these advances, there was still a lack of easy and user-friendly options for newcomers. In short, the period before hardware wallets was marked by significant security and usability challenges, making Bitcoin self-custody a complex and risky endeavor.
The first hardware wallet
In the years leading up to 2014, several attempts were made to develop simple, single-purpose devices for cryptocurrency storage. However, these efforts failed to gain traction or meet the necessary security standards. Recognizing the need for a robust solution, Slush and Stick monitored the landscape 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 hardware wallet ever, combining a user-friendly design, truly random private key generation, and the ability to easily sign transactions completely offline. Additionally, it implemented the BIP39 standard, a new standard created by the creators of Trezor to support wallets using a list of 24 words representing the private keys, a standard adopted by many wallets and familiar to anyone who has put their Bitcoin into self-custody.
When the user plugs in the device for the first time, it guides them through the setup process to create a new wallet. The device generates a recovery seed, which represents a human-readable version of the wallet's master private key and allows for recovery of the wallet in case the device malfunctions. The user is prompted to write down this list of words on a piece of paper, ensuring that the wallet is backed up and the private keys remain offline.
This onboarding process ensures that users create a backup and keep it safe. The user-friendly design offers advanced security, making hardware wallets accessible to both beginners and experienced users.
The advantage of open source
A key aspect of Bitcoin is its commitment to open source principles, and this is why the founders of Trezor adhered to the same principles when developing the Trezor Model One. This approach has been adopted by most manufacturers in the industry. Open source software allows the community to audit and verify the integrity of a system. This transparency ensures that potential vulnerabilities can be quickly identified and addressed and allows for improvement by the global community. The first hardware wallet was open source, and many in the industry have adopted this approach to transparency, emphasizing the Bitcoin ethos: “Don’t trust; verify.”
The importance of self-custody
Throughout Bitcoin’s lifespan, we’ve seen many cryptocurrency exchanges and custodians collapse or suffer serious security breaches, proving the importance of guarding your private keys. The “not your keys, not your coins” mantra emphasizes that trusting third-party institutions means trusting someone else with your assets, which can lead to big problems if the exchange is hacked, mismanaged, or faces legal issues.
The Mt. Gox incident in 2014, one of the earliest and most notable exchange collapses, resulted in the loss of 850,000 bitcoins, worth hundreds of millions of dollars at the time. This catastrophic failure was due to both hacking and mismanagement, leaving users unable to recover their funds. Bitfinex also suffered a major hack in 2016, resulting in nearly 120,000 bitcoins being stolen. QuadrigaCX in 2019 saw users lose access to their funds following the sudden death of its founder, who was the only one holding the keys to the exchange’s wallets. Cryptopia faced a debilitating hack in 2019, and Binance, the largest cryptocurrency exchange by volume, has also suffered breaches and faces increasing regulatory scrutiny. More recently, the collapse of FTX in 2022 further reinforced the dangers of entrusting assets to centralized entities. Overall, mismanagement and fraudulent activities led to the loss of billions, affecting countless users and undermining trust in centralized exchanges.
By using hardware wallets, people can achieve true financial independence, keeping their digital assets safe from the vulnerabilities of trusted custodians.
The changing landscape of hardware wallets
Over the past decade, the hardware wallet industry has expanded greatly, with many companies offering a variety of products and features to meet different needs. User interfaces now range from simple button-based navigation to touchscreens and full 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 advancement has been the inclusion 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 transparency issues. To address this problem, companies like Tropic Square are actively working on developing open source secure elements to improve trust and security.
Other important developments in the industry aim to improve the security and robustness of wallet backups. Techniques such as Shamir's Secret Sharing, Multisignature Wallets, and SeedXOR allow users to eliminate single points of failure, making it much harder for thieves to compromise the wallet.
Looking ahead, we can expect further improvements in the security and usability of hardware wallets. One notable development is the broader implementation of a new, improved standard, SLIP39, which uses the Shamir secret sharing method. This method is becoming preferred over the traditional BIP39 standard due to its increased security and ease of use. With SLIP39, users start with a single wordlist to back up their wallet and can later upgrade to a “sharded” backup with multiple shares. This approach provides a flexible and highly secure solution, making advanced security measures more accessible and practical for a wider range of users.
Looking ahead to the next decade
As we celebrate the launch of the first hardware wallet, it’s clear that this revolution has radically transformed 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 people to take control of their financial future. The journey from early prototypes to the sophisticated 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. Looking ahead to the next decade, the industry remains dedicated to protecting and innovating Bitcoin security and usability, ensuring that self-custody becomes increasingly accessible and secure for all.
This is a guest post by Josef Tetek. The views expressed are solely his own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
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