TL;DR
An air-gapped wallet is a type of crypto wallet that is designed to be completely disconnected from the internet and any form of wireless communication.
An air-gapped wallet generally signs transactions in an offline environment and interacts with online devices via QR codes or micro-SD cards.
Air-gapped wallets are generally considered more secure than other types of wallets.
Air-gapped wallets are not entirely foolproof and require a high level of user responsibility. They are more suitable for those who hold substantial amounts of assets for the long term.
What Is an Air-Gapped Wallet?
An air-gapped wallet is a type of cryptocurrency wallet that is designed to remain disconnected from the Internet and any form of wireless communication. The types of wireless communication that air-gapped wallets are disconnected from include Bluetooth, wifi, NFC (near-field communication), and sometimes even USB drives.
The term “air gap” comes from the concept of having a physical “gap of air” between the wallet device and any online networks or wireless communication, providing an extra layer of security against hacks and exploits.
How Does An Air-Gapped Wallet Work?
In order to facilitate transactions while remaining disconnected from the Internet and wireless communication, air-gapped wallets rely on scannable QR codes or micro-SD cards, which are small removable memory cards in which transaction data can be stored.
Air-gapped wallets commonly employ computer-based software applications that support Partially Signed Bitcoin Transactions (PSBTs) for Bitcoin or other similar partially signed transactions for different cryptocurrencies.
Let’s examine how an air-gapped wallet works in making a Bitcoin transaction.
Step 1: Creating a Partially Signed Bitcoin Transaction (PSBT)
Users generally set up a transaction on an online device with a Bitcoin wallet, specifying the recipient’s Bitcoin address and the amount to be sent.
Since this online device doesn’t have the user’s private key, it cannot fully sign the transaction. Instead, a Partially Signed Bitcoin Transaction (PSBT) is created with all the transaction details except the digital signature signed by the user’s private key.
Step 2: Signing the transaction
The unsigned transaction is transferred to the user’s air-gapped wallet by scanning a QR code. The transaction can also be recorded and stored as a file that can be read by a micro-SD card.
The air-gapped wallet has the private key and signs the transaction in the offline environment. It’s important to note that the air-gapped wallet is never connected to the Internet or wireless communications, which should, in theory, keep the private key safe.
Step 3: Broadcasting the transaction
The fully-signed transaction is transferred back to the online device, once again via a QR code or micro-SD card.
The online device broadcasts the signed transaction to the Bitcoin network. The transaction is then processed and confirmed by miners and recorded on the blockchain, like any other transaction.
Types of Air-Gapped Wallets
Air-gapped wallets can come in a variety of different forms but the following are the most common air-gapped wallets.
Air-gapped hardware wallets
These are specially-built hardware devices designed to store private keys offline. These wallets generally facilitate transactions without ever exposing the private keys to an online environment or wireless communications.
These devices usually have a digital screen to display transaction information and physical or touch buttons to manually approve transactions.
Air-gapped computers
Users can also dedicate an entire computer to serve as an air-gapped wallet. This computer is usually never connected to the Internet and is used exclusively for storing private keys and signing transactions.
The unsigned transactions are conveyed to air-gapped computers typically via a USB stick and the signed transactions are transferred out the same way. This approach can be more complex and requires a higher level of technical skills.
Air-gapped smartphones
Similar to air-gapped computers, a smartphone can also be used as an air-gapped wallet. The phones can be factory reset and set up without any connection to the Internet. Wallet software is installed via an SD card or similar methods. This can also be complex and will require advanced technical skills.
Differences Between Air-Gapped Wallets and Other Types of Wallets
To better understand air-gapped wallets, it’s useful to see how they compare with other types of wallets.
There are different ways to categorize wallets, and let’s see where an air-gapped wallet fits in each classification.
Categorizing crypto wallets based on connectivity
Hot wallets
A hot wallet is any wallet that is connected somehow to the internet. These wallets are easy to set up, and the funds are quickly accessible, making them convenient for traders and other frequent users.
Cold wallets
A cold wallet is disconnected from the Internet and uses a physical medium to store the keys offline. A cold wallet tends to be a safer alternative to storing crypto. This method is also known as cold storage and is suitable for long-term investors or "HODLers."
An air-gapped wallet is a specific type of cold wallet, but not all cold wallets are necessarily air-gapped wallets.
Categorizing crypto wallets based on physical form
Hardware wallets
A hardware wallet is a physical device that stores your private keys offline. They are cold wallets and similarly offer a higher level of security. They are typically used for long-term storage of large amounts of cryptocurrencies.
Software wallets
A software wallet is a program or an app that is installed on your computer or smartphone. They are generally connected to the Internet and are therefore hot wallets. This category includes web wallets, desktop wallets, and mobile wallets.
Paper wallets
A paper wallet is a piece of paper on which a crypto address and its private key are physically printed out in the form of QR codes. These codes can then be scanned to execute cryptocurrency transactions.
An air-gapped wallet is a type of hardware wallet, but not all hardware wallets are air-gapped wallets. A paper wallet can be technically considered an air-gapped wallet, but making transactions with a paper wallet often requires the private keys to be imported into a software wallet, which would break the air gap.
Categorizing crypto wallets based on control over private keys
Custodial wallets
Private keys to custodial wallets are controlled by a third party, such as an exchange. They are often easier to use but are much riskier than non-custodial wallets as the holder will rely on the third party for the security of their cryptocurrencies.
Non-custodial wallets
These are wallets where the user has full control of their private keys. These wallets allow users to have full control of their cryptocurrencies and no third party is involved. Most desktop wallets, mobile wallets, and hardware wallets belong to this category.
An air-gapped wallet is a type of non-custodial wallet, but not all non-custodial wallets are air-gapped wallets.
Differences Between Air-Gapped Wallets and Hardware Wallets
Air-gapped wallets are a type of hardware wallet, but there are some key differences between the two.
Connection to the Internet
An air-gapped wallet is never connected to the Internet. As mentioned above, air-gapped wallets conduct transactions by ensuring the private keys remain offline at all times.
A hardware wallet also stores keys offline but typically connects to an Internet-connected device to sign transactions. The private keys are designed to never leave the hardware wallet but hardware wallets do connect to an online device during the transaction signing process.
User Experience
Air-gapped wallets may require more steps to make a transaction, while hardware wallets usually offer a more straightforward process for signing transactions, as they're designed to connect directly with an online device.
However, hardware wallets generally still offer a high level of security when used correctly, as they're designed to keep the private keys isolated even when the device is connected.
Both air-gapped wallets and hardware wallets offer a high level of security by keeping private keys offline, with air-gapped wallets taking an extra step in maintaining a strict separation from Internet-connected devices.
Is an Air-Gapped Wallet More Secure?
The crypto community generally considers air-gapped wallets more secure than other types of wallets.
This added security comes from the fact that an air-gapped wallet is created and used on a device that is never connected to the Internet, isolating it from online threats such as hacking, phishing, and malware.
Air-gapped wallets store the private keys on devices that are completely offline, making it harder for malicious actors to steal the private keys without physical access to the device.
What Are the Risks and Limitations of Air-Gapped Wallets?
Air-gapped wallets are highly secure but it doesn’t mean they are infallible. There are still potential security vulnerabilities. If an air-gapped device is ever connected to the Internet mistakenly by the user, or if malicious software is introduced to the device through a USB stick (some air-gapped wallets use USB for charging and updates) or any other medium, the security of the device can be compromised.
There are also challenges for the user to maintain good physical protection of the air-gapped wallets from theft, damage, or loss. Users should follow best practices and keep backups of their keys securely to safeguard themselves against such risks. Lastly, ensuring correct and proper usage of air-gapped wallets requires a high degree of technical know-how.
Choosing the Right Air-Gapped Wallet
Crypto holders who have decided to invest in an air-gapped wallet should consider the following factors before choosing their device:
Compatibility
Ensure that the wallet supports the cryptocurrencies you intend to store. Different wallets may have varying levels of support for different cryptocurrencies — for instance, some wallets are designed to only store bitcoins. It’s crucial to check if your desired currencies are supported before making a decision.
Reputation and reviews
Research the wallet's reputation and read reviews from other users in the crypto community on platforms such as Twitter, Discord, and Reddit. The level of trust and support from the cryptocurrency community is also a crucial factor to consider. Well-established wallets with a strong community presence are generally more reliable and less likely to have security vulnerabilities.
Consider purchasing a wallet developed by a brand that has a strong track record and positive feedback regarding its security, reliability, and customer support.
Development community
Assess the wallet's development community on platforms such as GitHub and look out for ongoing updates. Active development indicates that the wallet is regularly maintained, with potential bug fixes and security enhancements.
User experience
Consider the ease of use and user interface of the wallet. A well-designed and intuitive interface can make managing your funds more convenient and user-friendly.
Closing Thoughts
Air-gapped wallets offer a high level of security for cryptocurrency users, especially those who hold substantial amounts of assets for the long term. They provide a robust defense against online threats by storing private keys on a device that is never connected to the Internet or any form of wireless communication.
Despite these advantages, air-gapped wallets are not entirely foolproof and require a high level of user responsibility. The security is primarily based on maintaining the integrity of the air gap and ensuring the physical safety of the device.
Air-gapped wallets may not be necessary for every user. Users who transact frequently or only hold a small amount of cryptocurrency may find other forms of wallets more convenient. The choice of wallet ultimately depends on the user’s needs, risk tolerance, and ability to manage the wallet's security.
Further Reading
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