What Is a Private Key, Mnemonic and Wallet Password

A private or closed key, mnemonic phrase and password are mandatory elements of a cryptocurrency wallet, the purpose of which is to protect the funds stored there from malicious use, blocking or other interference by third parties.

First of all, you should know that cryptocurrency wallets can be custodial (centralized) and non-custodial (decentralized). And if the mnemonic phrase and password are elements of both types of cryptocurrency wallets, then the private (closed) key can only be obtained by the user of a decentralised wallet.

Of course, custodial wallets also have keys, but the difference in the ability to access the keys determines the main difference between centralized wallets and decentralized ones.

In custodial wallets, the mnemonic phrase and keys are stored on the side of the platform that provides the wallet for use or to which it is linked, this could be a centralized crypto exchange, a brokerage firm, etc. On the one hand, this is convenient for the user - they will always help them recover their password and keys if they have lost them in some way.

But on the other hand, this is an open path for third parties to interfere with the management of assets stored in a centralized wallet. Third parties in this context can be hackers and scammers, as well as cryptocurrency or brokerage services, online banks, etc.

Even the short history of the cryptocurrency community already knows a sufficient number of examples of abuse on the part of exchange owners: from theft of funds from users' wallets to blocking assets due to reorganization without the subsequent return of these assets to their owners.

Moreover, when registering a decentralised wallet, its future owner does not need to disclose his identity, while centralised services require full verification with the provision of passport data.

That is, in the case of centralised services, your assets are essentially stored in someone else's wallet, and the owners and services of this resource have access to both the key and the mnemonic phrase. The question arises: is this really your wallet?

Another thing is a non-custodial wallet, that is, decentralized. Of course, here too there is a risk of being left without the funds stored on it, but the responsibility for their loss will be borne exclusively by the owner of this wallet. Note: in this case, we are talking about owning a wallet, and not just using it as belonging to the platform that provides it. Of course, you will use a decentralised wallet through this platform simply because it supports its functionality, in particular, integration with certain types of cryptocurrencies, tokens, decentralised applications, and even the brand of a cryptocurrency blockchain.

Otherwise, this decentralized wallet is completely controlled by you and cannot be accessed by any platform service that provides it.

And even if your decentralised wallet is linked to a cryptocurrency exchange that subsequently goes bankrupt, your funds will remain yours since only you have access to them in the form of a private key.

So, what happens to the owners of custodial wallets when a cryptocurrency exchange or platform goes bankrupt? They are the last in line to get their funds back, as the exchange pays all other costs first and often loses their assets.

Hence the conclusion – you should trust only yourself and not rely on promises of security from third parties, exchanges and services. A custodian service can be hacked, turn out to be a scam, block the user's assets, or implement sanctions, including for political reasons.

And this is impossible when storing funds on a decentralized wallet. Below we will analyze what elements are used by decentralized platforms that provide the ability to use non-custodial wallets.

But once again we remind you: in the case of using decentralized storage of assets, their owner, along with full control over these funds, bears sole responsibility for their safety and accessibility.

Private Key

Judge for yourself whether the most advanced hacker can conduct a selection of access to at least one wallet with funds, if for this he needs to go through such a number of options that is described by a number consisting of 70 digits.

This protection is provided by a private or closed key, created using cryptography. It gives the owner full access to their assets in a decentralized wallet. This “secret code” allows you to transfer and receive crypto assets (tokens, resources, etc.) - without it, decentralized wallets will not allow you to conduct transactions.

Any transactions with cryptocurrency assets through non-custodial wallets are carried out with two types of keys - private and public, which are valid only for each individual decentralized wallet.

The public key is called that because this address is available to all network users. But no one except the owner of the private key can use the funds stored in the blockchain registry at this address.

So, the private key is practically your personal signature. While the public key performs the cryptographic process to create the transaction. But it will not be carried out without confirmation - the signature of the owner of the wallet and the funds stored in it.

If the public key can be seen by everyone, including attackers who will not be able to use it to hack the wallet, then access to the private key by third parties should be completely excluded. Only the owner of the funds should know it to avoid their theft. Neither the blockchain services nor the platform that provides the opportunity to use a decentralized wallet have access to the private key. Attackers can only learn it from the owner.

As we have already reported above, it is impossible to select it due to the enormous time and computational costs of this process.

Example

A public or open key is an address accessible to everyone, to which the wallet owner can receive cryptocurrency resources, such as BTC, TRX, ERC, Energy, etc.;

A private key is a cryptographic, randomly generated key that allows the owner of a decentralized wallet to sign transactions and manage funds stored in the blockchain ledger at that address.

Mnemonic Phrase (Seed Phrase)

Another barrier to attempts at “unauthorized” use of funds stored in a decentralized wallet is a mnemonic phrase. Although, by and large, this set of 12 or 24 randomly combined words cannot be called a phrase.

This seed phrase can restore your right to manage your assets if you lose the private keys to your non-custodial wallet.

Therefore, you should take very seriously the warning (or request) that appears on the screen when creating a wallet: write down the seed phrase and store it in a place where no one else can access it. Remember that if you lose your private keys, without a mnemonic phrase, you will not be able to access your crypto assets - they will be lost to you forever.

Unlike centralized wallets, where keys and seed phrases are stored on the platform itself, the safety of these important elements of decentralized wallets is the responsibility of their owners.

Important:

· the mnemonic phrase must be rewritten exactly, strictly observing the order of the words and their spelling;

· do not transmit the mnemonic phrase even to the closest people by sending it over networks or in another way - even if the close ones turn out to be reliable, the information may be intercepted, since hackers monitor the owners of large assets in cryptocurrency and their correspondence on the network;

· do not store the seed phrase in the memory of an electronic device without additional encryption, since any device can be hacked.

Do not ignore the process of forming a mnemonic phrase. Be sure to follow the requirement when checking the correctness of its spelling, when the machine asks to name a word that is in the 4th, 10th or 22nd position in this set. We assure you that you will not regret the time spent if you happen to lose your private key, but save the mnemonic phrase.

Wallet Password

In addition to private keys and a mnemonic phrase, an additional level of security is also established by a password. This element protects the wallet itself on the device where it is installed. When creating a wallet, you generate a password yourself and enter it in the corresponding memory window.

Do not confuse the functions of the wallet password with the functions of private or public keys, as well as the mnemonic phrase. The wallet password protects unauthorized access to transactions and other wallet functions.

These are different levels of protection for different objects. The private key and seed phrase protect the funds stored there at the level of the blockchain platform to which the decentralised wallet is linked. And the password is the protection of the wallet interface at the level of the application itself, so that outsiders cannot use it without the owner's knowledge.

Example

To access assets stored in the cryptocurrency blockchain platform registry via a wallet, a private key and a mnemonic phrase are used.

To protect the decentralised wallet interface at the application level (not the blockchain), a password is used, which prevents third parties from using your decentralised wallet.

How Are These Related?

Private (closed) key – provides secure access to funds only to the owner of the decentralized wallet. This is the basis of security for non-custodial wallets. Private keys are stored directly by the wallet owner, without the possibility of access to them by outsiders.

A mnemonic phrase is insurance against loss of a private key, with its help you can quickly restore your right to manage your crypto assets by restoring lost keys.

A wallet password is an additional protection that operates not at the level of the cryptocurrency ecosystem but at the level of the device or application itself. The password does not allow intruders to access your wallet.