Once widely popular, paper wallets nowadays hold very few advantages in comparison to modern solutions. Let’s take a look at what paper wallets are, where they came from, and why most people probably shouldn’t use them.
What is a paper wallet?
A paper wallet is a method of storing cryptocurrencies by printing the key pair on a piece of paper. The key pair would usually take the form of two QR codes, one for the private key and one for the public key (the address).
The user would scan the printed public key to load a certain type of cryptocurrency on said address and then “spend” the balance after sweeping or importing the private key later, when necessary.
When paper wallets got popularized in mid-2011, it seemed to be the greatest thing since sliced bread. Until then, most people would leave the individual private keys laying on their hard drives. More cautious users used to make a copy of their wallet.dat (the file which stored the private keys in the original Bitcoin client) but even then, they had to rely on the durability of electronics and make sure the storage was not connected to the internet in any way.
Paper wallets provided a great way to keep the private keys offline and made it simple to transfer these coins to anyone — all without ever touching the Bitcoin blockchain. Everybody can imagine handing somebody a piece of paper, right?
In February 2012, Pieter Wuille published the Bitcoin Improvement Proposal 32 which drastically changed the process of generating the keys, and the structure of wallets overall. In this BIP titled “Hierarchical Deterministic Wallets”, Wuille specified a way of deriving the keys from a “Master Seed” in a hierarchical, tree-like structure. This means that from one seed, almost any given number of accounts and addresses can be generated — and these would come out the same every time you do so, given the same input (seed). In other words, at this point, you didn’t have to worry about individual keys so much, as long as you keep the master seed safely backed up.
Finally, in September 2013, theBIP-39 was created. First implemented in Trezor, BIP-39 describes the method of converting a random number into a set of common words which is then used to create a master seed of a wallet. This set of words is usually referred to as a seed phrase, recovery seed, or seed.
The recovery seed as defined in BIP-39 is now adopted by most of the popular modern wallets.
How do legacy paper wallets fare in comparison with hardware wallets?
Paper wallets remained a somewhat viable solution only for a handful of technically experienced users. We can assume, that the cost of creating and using a paper wallet could come at a relatively low cost for them if they already had the tools, previous experience, and a good understanding of the technology. Overall, using a paper wallet safely takes a lot of work and preparation.
For the absolute majority of users, especially beginners, one-key paper wallets hold no benefits over HD recovery seeds generated by a hardware wallet. You can achieve the security level of a paper wallet by writing your seed on a piece of paper and erasing the memory of the device which generated the seed. Looking at this, we can consider the HD seed to be a superset of classic paper wallets.
These are the specific factors we can use to compare paper wallets with hardware wallet (using a seed):
Hardware wallets have been designed to create and operate within an isolated environment. One of the basic premises you adopt when using a hardware wallet is that the computer and everything else connected to the internet might be compromised. To protect you against these dangers, hardware wallets generate the seed offline and use the secure trusted screen to show you the words directly on the device.
When creating a paper wallet, the burden of creating such a secure, isolated environment falls on the user. To mitigate the risk of the wallet being compromised from the start, you should use a live Linux from a CD, disconnect from the internet (preferably, you would use a machine which has never touched the internet before), and limit yourself to a “dumb” printer (with no access to the internet).
The bottom line is the same for both the paper and hardware wallets; You want your private keys offline and never see them have them anywhere in the digital form. Hardware wallets make the backup straightforward enough — from the device itself to your pen and paper.
If you have your paper wallet printed and your recovery seed is written down, you may want to think about storing these backups and the ways they can be used.
Paper wallets are usually limited to one key pair, which means that if you printed a bitcoin paper wallet, you have one address available, and this address will only be able to receive bitcoins. A seed used in a hardware wallet like Trezor can generate an almost unlimited number of addresses. The same seed can be used to handle wallets for multiple cryptocurrencies, encrypt passwords, authenticate login, sign messages, and more.
To get some security benefits of paper wallets, you have to consider them to be single-use devices. HD seeds can generate a fresh address for every new transaction so you never have to reuse an address. Using fresh addresses helps to maintain your privacy.
When using a paper wallet, you rely on QR codes and/or long strings of random characters (private key and the address in the base58 form). The seed is usually represented in a set of common English words which are far easier to read and work with. The seed can be easily stored in devices like Cryptosteel, or even memorized.
A BIP-39 seed is an industry standard supported by most of the popular wallets and endorsed by security experts. There are far more competing implementations of paper wallets, some less reliable and safe than others.
Importing the seed in a hardware wallet is just as easy as it is to create it. All of the words can be entered directly on the device and the hardware wallet ensures that the seed never leaves the secure environment. The mirrored level of convenience, or lack thereof, comes with the paper wallet too. When importing the private key from a paper wallet, you have to make sure the interface you’re using is free of malware and offline.
Hardware wallets handle the change for you when you send your transaction which makes it possible and easy to only spend fractions of your balance. Paper wallets are only good for spending the whole balance at once. Depending on which client you use to import the private key, you might be forced to manage your change manually.
Hardware wallets take care of the whole cycle of using cryptocurrencies (creating, storing, spending) in a secure and convenient manner. It is easy to use them to create the backup for your funds in an isolated and safe environment. The seed used in a hardware wallet is used for multitudes of different types of cryptocurrencies and features.
Paper wallets often prove to be too difficult to manage, especially for beginners and casual users who lack the in-depth knowledge of its mechanics.
In a scenario in which an experienced user could not get his/her hands on a hardware wallet (because of the logistics of getting one), using a paper wallet to keep the private key offline could be the second best thing.