When creating a self-custody crypto wallet, users are asked to write down and store a seed phrase that can be used to recover the wallet. But if this phrase is misplaced, users risk losing all of their crypto assets. Worse, your written seed phrase could be captured on camera for the world to see.
Hardware wallet startup Cypherock believes it has the solution to this potentially fraught scenario, and has raised seed funding to build it.
Cypherock exclusively told Decrypt this week that it has raised $1 million in a seed round with investments from ConsenSys Mesh, Infinite Capital, Gnosis and its co-founder Stefan George, Polygon co-founder Sandeep Nailwal, Mahin Gupta, OrangeDAO, and others.
Rohan Agarwal, co-founder and CEO of Cypherock, told Decrypt that the current approach to securing crypto wallets creates multiple opportunities for potential mishaps.
"You have to keep your wallet secure because they have been hacked before," he said. "And you have to keep your seed phrase secure, as well. So you now have two single points of failure that you have to keep secure."
This video of cops in Nevada searching a suspect and finding a seed phrase is pretty wild. Imagine having your seed phrase become part of public record due to it being captured by an officer's body camera! pic.twitter.com/vS2vm0xh7N
— Jameson Lopp (@lopp) December 18, 2022
The company’s Cypherock X1 hardware wallet, which launched in October 2022, uses four encrypted near-field communication (NFC) cards to store users' private keys and what would be the seed phrase. Tapping any of the cards to the wallet approves a transaction, and Cypherock advises that users store each in a different geographic location.
"These cards use the same secure hardware used in the banking industry for making debit cards and credit cards," Agarwal told Decrypt. "So using the same secure hardware, but our own software that is written inside these cards, we take that secure infrastructure and port it to Web3."
Hardware wallets, also known as cold storage, are considered the best option for securing Bitcoin and other cryptocurrencies. A hardware wallet keeps users’ private keys in a secure offline environment, safe from potential online attacks and intrusions.
Agarwal said that the Cypherock X1 can only be upgraded to support new cryptocurrencies, but the cards themselves can’t be upgraded or changed once shipped to users. The company took this stance to protect users from malicious attacks, and provide peace of mind that even a potential bad actor within Cypherock’s company couldn’t mess with their wallet.
"What that means is, even if there's a malicious software developer inside [Cypherock], they will only be able to compromise the device," he said. "They will never be able to compromise the cards."
Why should crypto investors consider Cypherock’s hardware wallet? Agarwal points to the frequent scams targeting crypto users, primarily phishing scams that ask users to connect their wallets to a malicious website or give their private key or seed phrase to scammers.
"During the bull market, there were so many people who lost funds because they didn't have that [technical knowledge] around managing a seed phrase, and they gave the phrase to random strangers on the internet trying to phish the users," Agarwal said.
But self-custody wallets can be tricky to use and secure. Just recently, Binance CEO and founder Changpeng “CZ” Zhao said that “99% of people” will lose crypto assets by mishandling a wallet. There’s also risk with writing down seed phrases, as seen in the police bodycam video example.
Cypherock’s unique system is not meant to lock users into its model, Agarwal explained, adding that its technology is open source and funds can be moved from their wallet whenever the users want. Users can view the seed phrase by tapping an NFC card and entering a PIN number, enabling access to transfer funds to another wallet if desired.
And if the Cypherock X1 wallet is lost, users can restore their crypto assets by tapping two of the four NFC cards on the new wallet. Customers can buy new cards from the company and restore assets with the remaining cards if any are lost.
"You should have one card and one device in the home and the rest of the three cards away from the home," Agarwal said. "So that, God forbid, [if] your house burns down, your funds are still recoverable from the remaining two or three cards that you might have given to someone else, or stored in a bank locker."
Cypherock’s seed funding will go towards product development and marketing, as well as adding more tokens and supporting NFTs. The firm also plans to further develop its multi-party computation (MPC) efforts. Multi-party computation is a subcategory of cryptography designed to create ways for users to share data while keeping the data private.
The company’s future plans include facilitating crypto inheritance, in which it helps whomever the user designates to receive their digital assets in the event of their death. Similar projects on the market include Sarcophagus, which offers a crypto "deadman" switch that transfers cryptocurrency if specific criteria are not met.
Agarwal told Decrypt that Cypherock is also working on an iOS and Android app that can be used in place of the hardware wallet. And because the firm’s technology is all open source, another developer could make an app that uses the cards—something that Agarwal said is necessary in case the company ever goes out of business.
"We are decentralization maximalists," Agarwal said. "We want to decentralize as much as possible on every spectrum and every layer."