BC2: Keys and digital signatures
Wallets, seed phrases and custody
🎯You'll be able to
Explain what a wallet holds, how seed phrases work, and the main ways of keeping keys safe.
🏠The everyday picture
A bank locker key: lose it and the bank can't simply open it for you; give a copy to someone and they can open it too.
📘What it really is
- A wallet is software or a device that holds private keys and signs with them. It doesn't hold coins; balances live on the chain.
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Seed phrases: 12 or 24 words (BIP-39) from which a wallet derives all its keys (BIP-32 and BIP-44). Anyone with the words has every key. Write them down offline and keep them safe from fire, water and other people.
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Hot and cold: a hot wallet is on an internet-connected phone or computer; a cold or hardware wallet keeps keys on a device that signs without exposing them.
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Custody: self-custody means you hold the key; a custodian (an exchange or a firm) holds it for you, which brings back a trusted middleman, with its own risks and rules.
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No reset: a lost key can't be recovered by anyone. Plans for loss come from design: backups, or several keys with a threshold (BC3).
📝A worked example
Input: the group's treasurer will hold one of five vault keys.
Steps:
- Use a hardware wallet, and set it up herself so nobody else sees the seed phrase.
- Write the 24 words on paper, store them in a sealed envelope in a locked place, and keep a second copy somewhere else.
- Don't type the words into a website or a chat; no genuine support person asks for them.
Expected output: a key that survives a lost phone and can't be taken from a phone virus.
🌍Where it's used
- Individuals with phone and hardware wallets.
- Exchanges and custodians holding keys for customers.
- Companies using hardware security modules (HSMs).
📝Case scenario
A family's savings in a phone wallet were lost when the phone was stolen and the seed phrase had only been saved as a screenshot on the same phone. A paper copy stored elsewhere would have let them restore every key on a new device.
🖱️Try it
List three places a seed phrase shouldn't be kept and one good place. Success: screenshots, cloud notes and chat apps are among the bad ones.
⚠️Common mistakes
- Seed phrase in a photo or cloud note. Sign: one hacked account exposes everything. Fix: offline, on paper or metal.
- Typing the phrase into a "support" form. Sign: a scam. Fix: no genuine service asks for it.
- One key for everything. Sign: one loss is total. Fix: separate keys, and thresholds for shared money.
🛠️For your project
The kit uses the practice network's test accounts, so no seed phrase is needed. The capstone design notes cover how real owners would hold their keys.
✅Quick check
What does a seed phrase give someone who has it?
Show the answer
Every key the wallet derives from it, and so control of all its accounts.
Can a lost private key be reset by the network?
Show the answer
No; recovery has to be planned in advance with backups or several keys.