Explained: What Are Seed Phrases?

There goes a saying in the crypto space: not your keys, not your coins. Seed phrases are considered the crypto industry standard for recovering lost Web3 wallets — but they are gradually becoming a major pain point for users

Estimates suggest that around a third of the current supply of Bitcoin is made up of potentially lost tokens. These statistics and the stories of investors digging through landfills for a lost seed phrase keep skeptics on the sidelines. As the application layer of the crypto ecosystem grows, wallet manufacturers are competing to own the layer of user experience in the Web3 space. But these developments also come with new risks. A recent report released by CertiK exposed malware that can steal the private keys of mobile wallets. In this article, we will start by explaining the seed phrase and will follow up with how it works.

A seed phrase is a series of 12 or 24 random words that provides the data needed to recover a lost or broken Web3 wallet. It is also known as a mnemonic phrase and is best understood as a security measure for self-custodied digital assets. Both hot wallets and cold wallets can use a seed phrase for recovery. For example, MetaMask (hot browser extension wallet) and Ledger all use seed phrases for recovery.

Seed phrases and private keys are often used interchangeably, but they are different. The private key is a string of numbers and letters used to approve a transaction from an owner’s public address.

They are safely stored in wallets so that users don’t have to manually enter them everytime they want to approve a transaction. The wallet seed phrase provides users with a way to recover that wallet if it is ever lost or broken. If for whatever reason, someone gets access to a private key though, they can move the funds without using the mnemonic seed phrase.

A general driving force behind crypto and the push to self-custody is a distrust of the banking system and more specifically, ‘centralized entities.’ Many who have been burnt by custodial crypto platforms and are concerned with their country’s monetary policy want to take full ownership of their assets. We can save the merits of their reasons for another article, but the point is, if users want an alternative that is truly permissionless, they also need to take security into their own hands.

One of the most widely-used standards for seed phrases is Bitcoin Improvement Proposal 39. And while it was initially proposed for BTC wallets, it became a popular standard across the board. It outlines how crypto wallets generate the phrase and reinterpret each word for wallet recovery. The sequence of events is essential to understanding how this works. Before a user’s new public and private keys exist, a wallet automatically generates a seed phrase or asks the user to provide one. It is a mnemonic phrase that is made up of 12 or 24 words.

The wallet software then converts the string of words into a binary seed and uses it to produce a set of private keys and public address pairings. Once users set up their wallet address and child public and private pairings, they don’t need to use the recovery seed phrase for access. Instead, they log in to their hardware wallet (cold) or software wallet (hot) with a passcode to automatically sign transactions. This keeps private keys out of view from the public.

The backup seed phrase comes into play if the user loses the device. In that event, the user should ideally have stored that seed phrase in a location separate from the crypto wallet. They would then use it to restore access to another compatible device. Mastering these skills and concepts is not just about learning the ropes of cryptocurrency management. It’s about embracing the responsibility of being your own bank. It’s about understanding that the safety and security of your crypto wallet, and every single word in your seed phrase is an essential part of that security.