In the same way that we keep cash or cards in a physical wallet, the Liquity USD are also stored in a wallet – a digital wallet. The digital wallet can be hardware-based or web-based.
It can also reside on a mobile device, on a computer desktop, or be kept secure by printing the private keys and addresses used to access it on paper. But how secure are these digital wallets?
The answer to this question depends on how the user manages the wallet. Each wallet contains a set of private keys without which the owner of the Liquity USD cannot access the currency. The biggest security danger of Liquity USD (LUSD) is that the individual user will lose or have their private key stolen. Without the private key, the user will never see their Liquity USD (LUSD).
In addition to the loss of the private key, a user can also lose their Liquity USD as a result of a computer malfunction (hard drive crash), hacking, or physical loss of the computer where the digital wallet is located.
How Wallets work for Liquity USD
Wallets Liquity USD contain a user's keys, allowing them to receive Liquity USD, sign transactions, and check their account balance. The private and public keys held in a wallet Liquity USD (LUSD) perform two separate functions, but are linked when they are created.
Wallets Liquity USD contain the user's keys, not the Liquity USD. Conceptually, a wallet is like a keychain in that it contains many private and public key pairs. These keys are used to sign transactions, allowing a user to prove ownership of transaction outputs on the blockchain, i.e., their Liquity USD. All Liquity USD (LUSD) are recorded on the blockchain as transactions.
If a user loses their wallet, they can use a mnemonic phrase to restore it. Securing private keys and mnemonic phrases is essential to protect against internal and external threats that can compromise users' Liquity USD.
Course of Liquity USD
Online portfolio vs. hardware portfolio
Like an external hard drive or USB flash drive, hardware wallets take cryptocurrencies like the Liquity USD and store them on physical pieces of hardware. Hardware wallets are less common than digital wallets or offline wallets for Liquity USD (LUSD) and can be more difficult to locate.
Advantages of hardware wallets: Hardware wallets offer completely anonymous transactions and do not store any of the user's personal data on the hardware. Unlike offline wallets, hardware wallets cannot be exposed to malware and offer a more secure environment to hold cryptocurrencies.
Disadvantages of hardware wallets: The advantages of the hardware wallet are essential that it has none of the challenges found in digital wallets, but the disadvantages also come down to the fact that hardware wallets are not digital. If you lose your physical wallet, the money stored in your hardware wallet will be lost forever.
Where to store your Liquity USD (LUSD)?
Storing on an online Wallet (Binance)
Binance is a 100% free digital wallet for storing cryptocurrencies, and thus your Liquity USD (LUSD), available for both iOS and Android devices, and on the internet.
It's a user-controlled product, not a freedom-depriving one. This ultimately means that it has all the security you wanted to apply to it (Dual authentication, SMS verification, Email..).
The wallet creates a 12-word recovery phrase when you initially install it, as on other platforms, and it is your responsibility to keep it secure; anyone in possession of the recovery phrase can access the wallet and the funds it contains by installing it on a new device.
When it comes to sending and receiving cryptocurrencies, Binance does its job very well; it has an elegant user interface, and the ability to send and receive cryptocurrencies with a simple username makes the process very streamlined.
Storage on a hardware Wallet (Ledger Nano)
Ledger creates hardware products for Liquity USD (LUSD) and many others since 2014. The Ledger Nano S is probably the most widely used and well-known hardware wallet on the market. There's a good reason for that. It supports over 1,150 cryptocurrencies. It is designed to leverage the security, flexibility and ease of backup of the Hierarchical Deterministic (HD) Wallet structure.
The Nano S provides cold storage by creating and storing your wallet private keys offline. It can also be integrated with third-party wallets to handle ERC-20 tokens. Ledger has done a lot of marketing around its “secure element” and has raised more VC money than any of its competitors.
Since then, it has received more than $88 million in funding from some of the world's top investors. Its most recent round of funding was $75 million in January 2018.
The slightly smaller features of the Nano S will not detract from the experience of a long-term HODLer who will likely leave the device unused for long periods.
Signing a Hot and Cold Portfolio
What is a hot portfolio? (Binance)
The hot crypto wallets have some notable advantages:
- They give you control over your crypto.
- They are almost always free.
- Furthermore, they are easy to use. You can send and receive cryptocurrencies very quickly with this type of wallet.
- Like hardware wallets, hot wallets come with a recovery phrase. You can use this phrase to recover your crypto if you lose access to the hot wallet.
There is one problem with hot wallets, but it is a big one. Because they store cryptocurrencies online, they are at risk of being hacked. While the odds are low and many people use hot wallets without difficulties, it's probably not a risk you want to take with large crypto funds.
What is a cold wallet? (Ledger Nano)
A cold wallet is an offline cryptocurrency wallet. There are various methods of cold storage of cryptocurrencies, including making your own free paper wallet. But the most common type of cold wallet is the hardware wallet.
Hardware wallets are small devices that connect to your computer and store cryptocurrencies. They connect to the Internet when sending and receiving cryptocurrencies, but other than that, they keep your funds offline.
Here's how cold hardware wallets work:
- Each hardware wallet has certain types of cryptocurrencies it can store. Some can store more than 1,000, while others store a much smaller number, like the Liquity USD (LUSD) and a few others.
- When you connect your hardware wallet to your computer, you can generate an address to receive cryptocurrencies into the wallet.
- You can send cryptocurrencies from the wallet to another crypto address.
Each hardware wallet has a recovery phrase (also called a recovery seed). This phrase allows you to recover your crypto if you lose the device itself. It is important to keep it safe, as anyone who has it can take your crypto.
Offline crypto storage is widely considered the best option from a security standpoint, and many platforms use it to protect most of their own crypto. As long as your crypto is offline, it cannot be stolen by hackers. For large amounts of cryptocurrencies, a cold wallet is a good investment. There are several very well priced hardware wallets available between $50 and $150.
Best practices for storing Liquity USD (LUSD)
Here are some tips to help you store your cryptocurrencies safely:
- Store the bulk of your cryptocurrencies in a cold wallet, as this is the safest option.
- Adopt a “hot wallet” for the small amounts of crypto you want to be able to trade.
- Physically save your cryptocurrency wallet recovery phrases. You can write them down, and there are also steel tools designed to record cryptocurrency recovery phrases.
- Save the recovery phrases in a safe place that only you can access.
- Never share the recovery phrase or private keys to your cryptocurrency wallet with anyone, and do not save them on your computer.
To summarize how to store cryptocurrencies safely, start by choosing one or more cryptocurrency wallets. I recommend going with a hardware wallet for most of your cryptocurrencies and downloading a hot wallet for cryptocurrencies for easy access. Send your cryptocurrencies to your wallets, save your recovery phrases, and — most importantly — keep those phrases in a safe place.