Decentralization is happening everywhere, so why are crypto wallets “walled gardens”?

The twin cryptocurrency and digital identity revolutions are supposed to be building a better future, where anybody can take charge of their sovereignty and security in a world where both face unprecedented threats. Yet at one crucial level, the decentralization ecosystem has a glaring vulnerability: consumer hardware wallets.

Devices like Ledger sell themselves as the last word in security for the crypto economy. Most end users will accept those marketing messages, hook, line, and sinker.

Why wouldn’t they? The learning curve for Bitcoin, crypto, and decentralized finance is precipitous. People are looking for a trusted guide up the mountain. Unfortunately, the hardware wallet industry is leading users blindly to the edge of a precipice – with ruinous consequences not just for crypto investors but, before long, for everyone.

Inside the black box

What’s wrong with hardware wallets? The best place to start is by pointing out what they got right.

The early years of crypto were marked by monthly tales of hacks, frauds, and exchange insolvencies, which led to people losing their entire investment because they kept it within online wallets. People didn’t realize this is just about the most insecure thing you can do – hell, many didn’t understand that they never actually possess cryptocurrencies, only the keys that control them.

Hardware wallets were a crucial step towards self-sovereignty, enabling people to take responsibility for their own security rather than being forced to trust online exchanges and other third parties.

I come to bury Ledger, however, not to praise it. And not just Ledger; most of the wallet industry has the same problem, being built on closed source, proprietary, “black box” technology. This is, of course, completely antithetical to the principles and practicalities of the decentralization revolution, which is built on open-source foundations.

Back around the dawn of Bitcoin, hardware wallet developers chose to adopt decades-old smart card technology (the same tech that’s in your credit card) to secure the keys. At no point did it occur to them that building on this legacy, black-box, closed-source technology was a problem.

Fast forward over a decade later and the leading hardware wallet is now an impenetrable “walled garden.” And now, as decentralization is taking over the world and set to transform almost every area of digital and financial interaction, we are realizing that the industry is built on a security layer of sand.

Walled gardens are unfit for the decentralized future

Make a “fat finger” error in your mobile banking app, and your bank will rectify the mistake and refund your money. In crypto, that transaction is irreversible.

That’s why it’s so important security experts, tech partners and consumers themselves can peek over the wall, examine the underlying technology, and evaluate whether they can trust it. Yet, when you buy a hardware wallet today, you don’t know what you’re getting.

First, there’s a good chance it’s manufactured in a country like China with cavalier (or sinister) approaches to personal security. It could contain a significant bug, or a backdoor to a malicious entity that will steal your identity or your funds.

Obviously, this matters massively to anyone who holds crypto; everyone else will likely shrug. They would be wise to pay attention. Beneath our noses, a new financial and data infrastructure is being built on the blockchain, with banks and payment providers already introducing applications and payment rails on these technologies. Before very long, we’ll all be signing transactions with cryptographic keys.

Or will we? Wallets’ walled garden approach threatens more than individuals’ security: it also puts the development of the entire decentralization economy at risk. To understand why, let’s look at Ledger again. Because every “app” has access to the master seed, each one needs to be reviewed and approved by Ledger. This is terrible for innovation, antithetical to the blockchain’s open-source ethos, and puts more control in the hands of these insecure wallet providers.

Just as the “first web” tended towards centralization, putting unparalleled power in the hands of just a few tech behemoths like Google and Facebook, hardware wallets represent an incredible concentration of vulnerability. How do we fix it?

Towards an open future

It sounds paradoxical, but the blockchain industry agrees that robust security can only be achieved through openness. Open-source, decentralized networks should be secured by open-source hardware and software that support open ecosystems.

And they can be – today. New hardware architecture and next-generation microkernel operating systems already support a fully open-source approach. This not only enables anyone to inspect and evaluate the underlying security of the device; it also ensures any developer can permissionlessly build and ship apps. Malicious or corrupted apps cannot affect others because they can live side-by-side in their own sandboxes.

I can’t tell you why the wallet industry failed to realize it was perpetuating security vulnerabilities, nor how it acts as a brake on innovation. I can’t tell you whether it was laziness, lack of imagination, or that they were content to rest on their laurels. I do know that devices like Ledger are the biggest threat to security in the Age of Decentralization – and that, thanks to open-source innovation, they’re already obsolete.