BIP39: how to create and restore your Bitcoin wallets securely

Do you want to know how BIP39 helps you manage your cryptographic keys with a simple mnemonic phrase? Find out in this article how this standard works and how to use it to protect your bitcoins.

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How BIP39 helps you create and restore your Bitcoin wallets

Do you struggle to manage your cryptocurrency wallets? Are you looking for a simple and secure solution to create and restore your wallets? You are not alone. According to a study, more than 20% of cryptocurrency users have lost access to their funds because of a forgotten or stolen private key. Fortunately, there is an innovative solution to avoid this problem: BIP39 and mnemonic phrases. In this article, we will explain what BIP39 is, how it works, what are its advantages and disadvantages, and which wallets support it.

What is BIP39 and how does it work?

BIP39, also known as Bitcoin Improvement Proposal 39, proposes a novel method to simplify the creation and recovery of cryptocurrency wallets. It relies on the use of mnemonic phrases, which are sequences of words easy to remember generated from a predefined list of words. These mnemonic phrases serve to derive the private keys that allow you to access your funds. The use of this method greatly simplifies the management and backup of wallets, avoiding the need to memorize complex private keys.

BIP39 is part of the many BIPs (Bitcoin Improvement Proposals) that aim to improve the Bitcoin protocol. It was proposed in 2013 by Marek Palatinus, Pavol Rusnak, Aaron Voisine and Sean Bowe. It was implemented on Bitcoin in 2014 and has been adopted by many other cryptocurrency projects since then. You can consult the official document of BIP39 here (link to https://github.com/bitcoin/bips/blob/master/bip-0039.mediawiki).

The benefits of BIP39

BIP39 has many benefits for cryptocurrency users. First of all, it simplifies considerably the process of creating and recovering wallets. Thanks to mnemonic phrases, it becomes easier to backup and restore your wallets in case of need. Moreover, these mnemonic phrases are generally more user-friendly, as they are composed of words in natural language, which makes them easier to remember.

Another important benefit is compatibility. Many hardware and software wallets support BIP39, which offers great flexibility in choosing the wallet suitable for your needs. Whether you prefer a physical wallet or a software solution, there is a high chance that you can find a wallet compatible with BIP39.

The drawbacks of BIP39

Despite its many benefits, BIP39 also has some drawbacks. The main drawback lies in the security of the mnemonic phrase. Given that the mnemonic phrase is the key to access your funds, its loss or theft can result in the total loss of your cryptocurrencies. It is therefore crucial to take appropriate security measures to protect your mnemonic phrase, such as secure backup in an offline location.

Another drawback is the dependence on wallet software compatible with BIP39. It is important to verify that the wallet you use supports BIP39 before generating your mnemonic phrase. Otherwise, you may not be able to access your funds with another wallet that uses the same protocol.

Cold wallet vs hardware wallet: what’s the difference?

If you own cryptocurrencies, you need a wallet to store and manage them. But not all wallets are the same. In this article, we will explain the difference between a cold wallet and a hardware wallet, and how to choose the best one for your needs.

What is a cold wallet?

A cold wallet is a type of hardware wallet that is very secure: it never interacts with any smart contract or external source; it only stores assets and executes transfers between your other wallets. For example, a hardware wallet that is not used to explore Web3 can be considered a cold wallet.

What is a hardware wallet?

A hardware wallet is a physical device that stores your private keys in an isolated environment from an internet connection. This is important, because anyone who has access to your private keys has access to your crypto. A hardware wallet also allows you to sign transactions; enabling you to interact with different blockchain networks.

What is the difference between a cold wallet and a hardware wallet?

The main difference between a cold wallet and a hardware wallet is the level of interaction with smart contracts and external sources. A cold wallet is safer than a hardware wallet active online, because it does not face any threat from interactions with smart contracts.

Here is a summary table of the advantages and disadvantages of each type of wallet:

What standard is used to generate the mnemonic phrase or mnemonic code?

Another important aspect to consider when choosing a wallet is the standard used to generate the mnemonic phrase or mnemonic code. This is a group of easy-to-remember words that serves as a backup for your wallet in case of loss or destruction. The most common standard is BIP39, which is used by many deterministic (HD) wallets and not only by Bitcoin wallets. It has also been adopted for use in many other cryptocurrency projects.

Cold wallets and hardware wallets generally use BIP39 for master key generation. Some hardware wallets also use other BIPs to improve the security and functionality of their wallets. For example:

• The Trezor Model T uses BIP32, BIP39, BIP44 and SLIP39. SLIP39 is an improvement of BIP39 that allows creating split backups (Shamir Backup) for increased security.
• The Coldcard uses BIP32, BIP39 and BIP174. BIP174 is a standardized format for partially signed transactions (PSBT) that allows signing transactions offline.

What are the different types of cold wallets and hardware wallets?

There are different types of cold wallets and hardware wallets, and some can belong to both categories. For example, the Keepser is an NFC cold wallet that uses BIP39 to save seed phrases generated by other wallets or blockchains. It is therefore a type of hardware wallet that comes in the form of a contactless card that communicates with an application on your smartphone. The Keepser only protects cryptocurrency private keys, and not other types of private keys. It also allows printing private keys and seed phrases in the form of encrypted QR codes, which can be scanned by the Keepser application to restore wallets. The Keepser uses EviVault and EviSeed technology developed by Freemindtronic, a company specialized in cybersecurity and custom product design.

It is therefore important to check what standards are supported by the wallet you choose and how they affect the security and compatibility of your wallet.

How to secure your mnemonic phrase with EviSeed?

If you use a BIP39-compatible wallet, you must imperatively protect your mnemonic phrase against any loss or theft. An innovative solution for this is EviSeed, developed by Freemindtronic. EviSeed is an electronic device that allows you to store your mnemonic phrase in a secure and resistant NFC card against physical or logical attacks.

EviSeed offers several advantages over traditional backup methods on paper or metal:

• It is easy to use: just approach your NFC card from a compatible smartphone to display your mnemonic phrase.
• It is secure: it uses a patented algorithm that encrypts your mnemonic phrase with a personal PIN code.
• It is durable: it resists shocks, water, fire and magnetic fields.

EviSeed is compatible with all wallets that support BIP39, such as Ledger, Trezor or Metamask. You can order your EviSeed on Freemindtronic’s official website (link to https://freemindtronic.com/eviseed/en/).

Some real-life examples of people who lost their keys

You may think that losing your mnemonic phrase is a rare or unlikely case. Think again! Many people have already experienced this misadventure, sometimes with dramatic consequences. Here are some real-life examples taken from the media:

• Stefan Thomas, a programmer living in San Francisco, owns 7 002 Bitcoin that he cannot recover because he lost the password of his IronKey hard drive, which contains the private keys of his wallet1. He only has two attempts left before his hard drive locks permanently.
• James Howells, a British computer scientist, accidentally threw away his hard drive containing 7 500 Bitcoin in 20132. He tried unsuccessfully to find his hard drive in a municipal landfill.
• Brad Yasar, an entrepreneur living in Los Angeles, mined thousands of Bitcoin at the beginning of the project3. But he forgot his passwords and failed to access his wallets despite hundreds of hours spent trying.
• Luke Dashjr, one of the original developers of Bitcoin Core, said he lost more than 200 Bitcoin after his PGP key was compromised on December 31, 20224. He claimed he did not know how hackers were able to access his key.

These examples show well the importance of using a reliable and secure method to backup your mnemonic phrase. With EviSeed, you can avoid this kind of situation and enjoy your cryptocurrencies peacefully.

Other standards related to BIP39

BIP39 is not the only standard that concerns the generation and management of cryptocurrency wallets. There are other standards that are related to BIP39 or that propose alternatives to it. Here are some examples:

• The BIP32 is another standard that describes how to generate deterministic wallets from a master key. The BIP32 allows creating a hierarchy of derived keys from a single master key, which facilitates the organization and backup of wallets. The BIP32 uses a hash function to derive keys, which ensures that keys are unpredictable and independent from each other. The BIP39 is a method to create a master key from a mnemonic phrase. The two standards are often used together to create deterministic wallets from mnemonic phrases.

• The BIP44 is an extension of the BIP32 that defines a hierarchical structure for deterministic wallets. It allows managing multiple accounts and multiple currencies with a single mnemonic phrase. The BIP44 defines five levels of derivation: purpose, currency, account, address type, and address index. The purpose is fixed at 44’ to indicate that the wallet follows the BIP44. The currency is a numerical code that identifies the currency used (for example, 0’ for Bitcoin, 60’ for Ethereum). The account is a number that allows separating funds according to personal criteria (for example, 0’ for the main account, 1’ for the secondary account). The address type is a bit that indicates if the wallet uses external addresses (0) or internal addresses (1). External addresses are those that are used to receive payments, while internal addresses are those that are used to send changes. The address index is a number that identifies each address within the address type. For example, the address m/44’/0’/0’/0/0 corresponds to the first external address of the first Bitcoin account of the wallet.

• The SLIP39 (Shamir’s Secret-Sharing for Mnemonic Codes) is an alternative to BIP39 that allows splitting a mnemonic phrase into several parts that must be combined to restore the master key. The SLIP39 uses Shamir’s secret-sharing scheme, a cryptographic algorithm that allows distributing a secret into several pieces, called shares, such that a minimum number of shares is required to reconstruct the secret. For example, one can split a mnemonic phrase into five shares, of which three are required to restore it. This allows increasing security and redundancy of the wallet, by avoiding that one single share is enough to access funds or that one single share lost makes the wallet irrecoverable.

• The Electrum Seed Version System is a system used by Electrum wallet to generate and verify mnemonic phrases. It differs from BIP39by several aspects: it uses a different word list, it does not use a checksum but a version code, it allows generating mnemonic phrases of variable lengths (12, 18 or 24 words), it allows deriving keys and addresses from a hash of the mnemonic phrase without depending on a fixed word list, it supports different types of mnemonic phrases according to the type of wallet (standard, multisig or segwit).

• The Monero Seed Format is a format used by Monero wallet to generate and verify mnemonic phrases. It differs from BIP39 by several aspects: it uses a different word list, it uses a different checksum based on CRC32, it allows generating mnemonic phrases of 13 or 25 words depending on the seed length (128 or 256 bits), it allows deriving keys and addresses from the seed without depending on a fixed word list.

The segmented key authentication technology

Another innovative technology that allows to protect sensitive data such as mnemonic phrases by using encryption keys that are stored on different supports is the segmented key authentication technology. This technology was invented by Jacques Gascuel, a Frenchman living in Andorra, founder of the Andorran company Freemindtronic, is also patented in the USA under number US11281759B2 in 2020.

According to the invention, the encryption keys of the mnemonic phrases are segmented into several parts, which allows to store them on different supports such as contactless devices, phones, computers or a paper print with a QR code. Each mnemonic phrase is associated with an NFC HSM device and/or an EviCore OpenPGP HSM from Freemindtronic, which contains a part of the encryption key, which can be a pairing key. This part allows to decrypt the mnemonic phrase when the other parts are gathered. The other parts can be validated in different ways, such as a password, a fingerprint, a geofence or an identifier of the phone or network, etc. The technology allows to create different segmentation combinations for each mnemonic phrase. To reconstruct the encryption key and access the mnemonic phrase, one must approach the NFC HSM device from the phone and validate the other parts according to the order chosen by the user or automatically if all conditions are met.

According to one of the implementations of the invention, the key segments chosen by the user to constitute the decryption key can be of physical or digital origin. For example, the user can choose a key segment that corresponds to a geofence, thus allowing to decrypt the mnemonic phrase without requiring any other action, apart from being physically in the right geographical area. Of course, this key segment is associated with at least another key segment, such as the identifier of the user’s phone. This greatly improves user experience without compromising security level, as there are other default authentication factors integrated into NFC devices, such as also segmented pairing key, NFC identifier, unique 128-bit key, administrator and/or user password, as well as phone fingerprint.

Finally, an advantage of this technology is that key segments can be entrusted to various third parties without any risk. For example, a third party can hold a key segment without knowing what type of segment he owns, whether it is a BSSID, a geofence or a phone identifier that will receive a donation. There is virtually no limit to this. It is an effective solution for donations and inheritances, where the notary or lawyer can have a geofence key segment that he can only use in a specific place defined in a will or under the supervision of a bailiff.

Conclusion

In summary, BIP39 is a major improvement proposal to simplify the management of cryptocurrency wallets. Thanks to the use of mnemonic phrases, it offers a user-friendly and secure solution to create and recover your wallets. However, it is crucial to protect your mnemonic phrase against any loss or theft, and to choose a reliable and compatible wallet with BIP39.

We hope that this article has helped you understand better the functioning and benefits of BIP39. If you have any questions or comments, we would love to help you in the section below. Simplify your cryptocurrency management experience with BIP39!