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Add Subsection About Wallet Programs, Incl. Hardware Wallets
Describe the essential functions of a wallet program and how multiple programs can work together to fulfill those functions, as in the case of a signing-only wallet.
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David A. Harding
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{% autocrossref %}
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Bitcoin wallets at their core are a collection of private keys. These collections are stored digitally in a file, or can even be physically stored on pieces of paper.
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A Bitcoin wallet can refer to either a wallet program or a wallet file.
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Wallet programs create public keys to receive satoshis and use the
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corresponding private keys to spend those satoshis. Wallet files
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store private keys and (optionally) other information related to
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transactions for the wallet program.
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Wallet programs and wallet files are addressed below in separate
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subsections, and this document attempts to always make it clear whether
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we're talking about wallet programs or wallet files.
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{% endautocrossref %}
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### Private Key Formats
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### Wallet Programs
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{% autocrossref %}
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Permitting receiving and spending of satoshis is the only essential
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feature of wallet software---but a particular wallet program doesn't
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need to do both things. Two wallet programs can work together, one
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program distributing public keys in order to receive satoshis and
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another program signing transactions spending those satoshis.
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Wallet programs also need to interact with the peer-to-peer network to
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get information from the block chain and to broadcast new transactions.
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However, the programs which distribute public keys or sign transactions
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don't need to interact with the peer-to-peer network themselves.
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This leaves us with three necessary, but separable, parts of a wallet
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system: a public key distribution program, a signing program, and a
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networked program. In the subsections below, we will describe common
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combinations of these parts.
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{% endautocrossref %}
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#### Full-Service Wallets
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{% autocrossref %}
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The simplest wallet is a program which performs all three functions: it
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generates private keys, derives the corresponding public keys, helps
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distribute those public keys as necessary, monitors for outputs spent to
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those public keys, creates and signs transactions spending those
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outputs, and broadcasts the signed transactions.
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As of this writing, almost all popular wallets can be used as
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full-service wallets.
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The main advantage of full-service wallets is that they are easy to use.
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A single program does everything the user needs to receive and spend
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satoshis.
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The main disadvantage of full-service wallets is that they store the
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private keys on a device connected to the Internet. The compromise of
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such devices is a common occurrence, and an Internet connection makes it
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easy to transmit private keys from a compromised device to an attacker.
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To help protect against theft, many wallet programs offer users the
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option of encrypting the wallet files which contain the private keys.
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This protects the private keys when they aren't being used, but it
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cannot protect against an attack designed to capture the encryption
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key or to read the decrypted keys from memory.
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{% endautocrossref %}
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#### Signing-Only Wallets
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{% autocrossref %}
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To increase security, private keys can be generated and stored by a
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separate wallet program operating in a more secure environment. These
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signing-only wallets work in conjunction with a networked wallet which
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interacts with the peer-to-peer network.
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Signing-only wallets programs typically use deterministic key creation
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(described in a later subsection) to create parent private and public
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keys which can create child private and public keys.
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When first run, the signing-only wallet creates a parent private key and
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transfers the corresponding parent public key to the networked wallet.
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The networked wallet uses the parent public key to derive child public
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keys, optionally helps distribute them, monitors for outputs spent to
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those public keys, creates unsigned transactions spending those outputs,
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and transfers the unsigned transactions to the signing-only wallet.
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Often, users are given a chance to review the unsigned transactions' details
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(particularly the output details) using the signing-only wallet.
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After the optional review step, the offline wallet uses the parent
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private key to derive the appropriate child private keys and signs the
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transactions, giving the signed transactions back to the networked wallet.
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The networked wallet then broadcasts the signed transactions to the
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peer-to-peer network.
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The following subsections describe the two most common variants of
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signing-only wallets: offline wallets and hardware wallets.
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{% endautocrossref %}
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##### Offline Wallets
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{% autocrossref %}
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Several full-service wallets programs will also operate as two separate
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wallets: one program instance acting as a signing-only wallet (often called an
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"offline wallet") and the other program instance acting as the networked
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wallet (often called an "online wallet" or "watching-only wallet").
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The offline wallet is so named because it is intended to be run on a
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device which does not connect to any network, greatly reducing the
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number of attack vectors. If this is the case, it is usually up to the
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user to handle all data transfer using removable media such as USB
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drives. The user's workflow is something like:
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1. (Offline) Disable all network connections on a device and install the wallet
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software. Start the wallet software in offline mode to create the
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parent private and public keys. Copy the parent public key to
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removable media.
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2. (Online) Install the wallet software on another device, this one
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connected to the Internet, and import the parent public key from the
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removable media. As you would with a full-service wallet, distribute
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public keys to receive payment. When ready to spend satoshis, fill in
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the output details and save the unsigned transaction generated by the
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wallet to removable media.
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3. (Offline) Open the unsigned transaction in the offline instance,
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review the output details to make sure they spend the correct
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amount to the correct address. This prevents malware on the online
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wallet from tricking the user into signing a transaction which pays
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an attacker. After review, sign the transaction and save it to
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removable media.
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4. (Online) Open the signed transaction in the online instance so it can
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broadcast it to the peer-to-peer network.
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The primary advantage of offline wallets is their possibility for
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greatly improved security over full-service wallets. As long as the
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offline wallet is not compromised (or flawed) and the user reviews all outgoing
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transactions before signing, the user's satoshis are safe even if the
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online wallet is compromised.
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The primary disadvantage of offline wallets is hassle. For maximum
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security, they require the user dedicate a device to only offline tasks.
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The offline device must be booted up whenever funds are to be spent, and
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the user must physically copy data from the online device to the offline
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device and back.
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{% endautocrossref %}
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##### Hardware Wallets
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{% autocrossref %}
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Hardware wallets are devices dedicated to running a signing-only wallet.
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Their dedication lets them eliminate many of the vulnerabilities
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present in operating systems designed for general use, allowing them
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to safely communicate directly with other devices so users don't need to
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transfer data manually. The user's workflow is something like:
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1. (Hardware) Create parent private and public keys. Connect hardware
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wallet to a networked device so it can get the parent public key.
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2. (Networked) As you would with a full-service wallet, distribute
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public keys to receive payment. When ready to spend satoshis, fill in
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the transaction details, connect the hardware wallet, and click
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Spend. The networked wallet will automatically send the transaction
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details to the hardware wallet.
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3. (Hardware) Review the transaction details on the hardware wallet's
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screen. Some hardware wallets may prompt for a passphrase or PIN
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number. The hardware wallet signs the transaction and uploads it to
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the networked wallet.
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4. (Networked) The networked wallet receives the signed transaction from
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the hardware wallet and broadcasts it to the network.
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The primary advantage of hardware wallets is their possibility for
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greatly improved security over full-service wallets with much less
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hassle than offline wallets.
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The primary disadvantage of hardware wallets is their hassle. Even
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though the hassle is less than that of offline wallets, the user must
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still purchase a hardware wallet device and carry it with them whenever
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they need to make a transaction using the signing-only wallet.
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An additional (hopefully temporary) disadvantage is that, as of this
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writing, very few popular wallet programs support hardware
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wallets---although almost all popular wallet programs have announced
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their intention to support at least one model of hardware wallet.
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{% endautocrossref %}
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#### Distributing-Only Wallets
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{% autocrossref %}
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Wallet programs which run in difficult-to-secure environments, such as
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webservers, can be designed to distribute public keys (including P2PKH
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or P2SH addresses) and nothing more. There are two common ways to
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design these minimalist wallets:
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* Pre-populate a database with a number of public keys or addresses, and
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then distribute on request an output script or address using one of
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the database entries.
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* Use a parent public key to create child public keys. To [avoid key
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reuse][devguide avoiding key reuse], a method must be used to ensure the same public key isn't
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distributed twice. This can be a database entry for each key
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distributed or an incrementing pointer to the current child key
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index number.
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Neither method adds a significant amount of overhead, especially if a
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database is used anyway to associate each incoming payment with a
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separate public key for payment tracking. See the [Payment
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Processing][devguide payment processing] section for details.
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{% endautocrossref %}
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### Wallet Files
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{% autocrossref %}
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Bitcoin wallets at their core are a collection of private keys. These
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collections are stored digitally in a file, or can even be physically
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stored on pieces of paper.
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{% endautocrossref %}
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#### Private Key Formats
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{% autocrossref %}
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@ -16,7 +256,7 @@ Private keys are what are used to unlock satoshis from a particular address. In
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{% endautocrossref %}
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#### Wallet Import Format (WIF)
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##### Wallet Import Format (WIF)
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{% autocrossref %}
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@ -40,7 +280,7 @@ The process is easily reversible, using the Base58 decoding function, and removi
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{% endautocrossref %}
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#### Mini Private Key Format
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##### Mini Private Key Format
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{% autocrossref %}
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@ -62,7 +302,7 @@ address utility].
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{% endautocrossref %}
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### Hierarchical Deterministic Key Creation
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#### Hierarchical Deterministic Key Creation
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<!--
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For consistent word ordering:
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@ -211,7 +451,7 @@ which makes them special.
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{% endautocrossref %}
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#### Hardened Keys
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##### Hardened Keys
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{% autocrossref %}
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@ -300,7 +540,7 @@ for the full HD protocol specification.
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{% endautocrossref %}
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#### Storing Root Seeds
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##### Storing Root Seeds
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{% autocrossref %}
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@ -335,7 +575,7 @@ For implementation details, please see BIP39.
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### Loose-Key Wallets
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#### Loose-Key Wallets
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{% autocrossref %}
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