Private Key: The Key to Your Crypto

Before a crypto transaction notifies the blockchain where to send funds, it must first verify that the person sending crypto has the right to spend them in the first place. Had this sort of validation not existed, anyone could be trying to spend any funds from any address.

And so, the blockchain needs a way to differentiate between legitimate and illegitimate transactions. The mechanism behind that starts with the private key.

1How Private Keys Work

A private key is a randomly generated number that a wallet uses to produce digital signatures for transactions. It is tied to a public key, which can be shared openly without compromising the private key.

When sending crypto, your wallet will create a transaction with specific information, including where the funds should go, the amount you want to send, so on and so forth.  After that, the wallet will use the private key to create a digital signature based on those transaction details. The transaction is then broadcast with the signature, and the public key can be used to verify whether that signature is valid.

A private key signs crypto transactions, while its corresponding public key verifies the signatures.

A valid signature would prove that the transaction was created by someone with access to the private key related to the funds that are being moved. Anyone who has their hands on a private key can, therefore, create valid signatures and move the funds it controls. This is also why the private key is so important and why it must be kept secure.

2Private Key Management

Managing private keys starts with understanding who holds them, what makes them secure, and how wallet recovery works.

Who Controls a Private Key?

In practice users don't always directly hold their own private keys.

In the case of a custodial wallet, the private key will be stored by a trusted third party. You can access the account using certain credentials like a password or an authentication code, but the underlying keys and transaction signing will be handled by the provider's infrastructure.

On the other hand, using a non-custodial wallet means that you hold the private key yourself. This is known as self-custody. The wallet will allow you to sign transactions and do anything else required, but, at the same time, it's up to you to keep the keys safe and to maintain access to the wallet.

Custodial wallets and non-custodial manage the private key differently.

How Secure Is a Private Key?

Thankfully, private keys are usually unguessable. For example, the private keys for Bitcoin only take about 2²⁵⁶ possible values , making it statistically improbable that you'll randomly find a key that has access to another person’s crypto.

This is also why you shouldn't trust a website that claims that it has a list of Bitcoin private keys with accessible balances. 

Seed Phrase vs. Private Key: Can Your Private Key Be Recovered?

A lost private key cannot be recovered. However, self-custody wallets usually have a seed phrase that can recreate the same private keys.

Enter the seed phrase into a compatible wallet and it can regenerate the wallet's multiple private keys and the addresses that belong to the wallet. This means that you won't lose the funds in the wallet just because you lost one private key, as long as you have the seed phrase. Losing the seed phrase, on the other hand, could be much worse (we're NOT saying that your private keys are not important!).

Losing both the keys and the seed phrase can make your crypto permanently inaccessible.

3How to Protect Your Private Key

Protecting your crypto involves more than keeping a private key secret.

Keep Your Seed Phrase Safe

A seed phrase needs to be stored in a way that keeps it available for recovery without making it easy for someone else to obtain. Storing it digitally can create another way for an attacker to access it. An unencrypted screenshot, photo, or plain-text file could be easily exposed if the device or account is compromised.

That being said, a physical paper copy isn't much better if it is left somewhere vulnerable, such as next to the TV or on the kitchen counter. The appropriate way to store the copy of your seed phrase, therefore, depends on what you are protecting and the risks that surround where you are storing it.

Store your seed phrase where you can retrieve it for recovery.

Reduce Private Key Exposure

Unfortunately, simply keeping the private key secret isn't always enough. If the key is stored on a computer that can connect to the internet, a hacker can find a way into that machine and steal said private key.

A hardware wallet, on the other hand, can help keep the private key on a separate physical device rather than exposing it to the computer during normal signing. The computer can still be used to prepare and send a transaction, while the private key remains isolated on the hardware wallet. This reduces the attack surface compared with storing the key in software on an internet-connected device.

Verify Transactions Before Signing

A transaction can still be dangerous even if it comes from a website or dApp that you had intended to use. Malicious or compromised applications may present misleading transaction details and rely on you not checking carefully and approving an action that you did not mean to do.

This is why verifying the transaction details on your wallet or hardware wallet is a crucial step before approving any transactions that involve (any amount of) money. Look at the recipient, the amount, and other relevant details so that you can spot anything that differs from what you intended to do.

Always verify the recipient, amount, and other transaction details in your wallet before approving.

For regular interactions with unfamiliar or higher-risk dApps, you can also keep those activities in a separate wallet from one that you use for long-term storage. That way, if an approval or compromised application puts the active wallet in danger, it will only have access to the smaller amount of money in this wallet instead of everything that you have.

4What to Do If Your Private Key Is Lost or Compromised

Losing access to a private key and having it fall into someone else’s hands require different responses.

If You Lose Your Private Key

If you still have the seed phrase used to create the wallet, enter the seed phrase into a compatible wallet application to restore access to that wallet.

By contrast, if you don't have the seed phrase or another way of recovering the private key, there isn't much that you can do to recover a self-custody wallet. Customer support, block explorers, and the blockchain network can't recreate a private key that has been lost.

If Someone Has Your Private Key

What you need to do after a private key is exposed depends on whether the compromise is limited to that key or extends to the wallet's seed phrase.

If only a single private key has been exposed and the wallet contains funds, move those funds to a new address controlled by a newly generated private key as soon as possible. Once the funds are moved, the exposed key no longer controls them.

If only one private key is exposed, move the affected funds to a new address with new private key.

In case the seed phrase has been exposed, however, creating a new address from that same seed phrase does not solve the problem. As mentioned, the seed phrase can recreate the wallet's private keys, so the entire wallet should be treated as compromised. You need to immediately move your crypto to a completely new wallet that's created with a new seed phrase.

5A Final Word on Private Key

Coinminutes' final goal when writing this article is not to tell you how you should store your private keys. Rather, we hope that we were able to give you the general information that you need to know about private keys and the importance of keeping them secure.

Now that you've somewhat grasped some of the main concepts of a private key, maybe a more in-depth article on your self-custody, wallet security, or transaction signing is in queue? Or, maybe following how private keys and wallet technology continue to evolve is more so your cup of tea?

If those are the kinds of crypto coverage that you are looking for, check out our website at https://coinminutes.com/ for more updates.