Crypto wallet recovery without a private key or seed phrase

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When individuals forget their online banking credentials, they only need to visit their local bank branch with the necessary documentation to identify themselves and recover access to their account. The same goes for traditional brokerages; they can reset their password online or contact support for assistance with the recovery process.

But while recovery is easy for custodial services like online banking and brokerages, things can get quite complicated in crypto. On the one hand, self-custody significantly reduces counterparty risks and prevents loss of funds in situations like the infamous Mt.Gox hack and the FTX bankruptcy. On the other hand, it comes with more responsibility for investors.

There is no customer support team that can help crypto investors recover their self-custody wallets if their private keys or initial phrases are lost. At that point, the funds are lost forever. In fact, a Chainalysis report estimates the loss of 3.7 million Bitcoins (BTC) worth more than $220 billion at $60,000, which equates to 18.74% of the current circulating supply. At the same time, personal research by Coinbase Director Conor Grogan reveals that more than 912,000 Ethereum (ETH) are lost forever (worth $2.41 billion). While this represents only 0.75% of the total circulating Ether supply, lost keys account for 27.5% of cases.

The most common scenarios for losing access to crypto wallets

In what situations do experienced crypto users, web3 creators, and business owners lose access to their cryptocurrencies? Let’s look at some example scenarios to better understand what can lead to lost keys.

In Scenario One, a crypto user stores the private key on the desktop and backs up the seed phrase on the same device. After upgrading to a new device, he wipes the hard drive of his old computer, forgetting that he stored his keys and seed phrases there. As a result, his crypto assets are gone forever.

Scenario Two presents another nightmarish example of human error. This time, an investor backs up the recovery phrase offline, prints it on a piece of paper, and stores it in their home with other documents. However, after moving to a new apartment, the piece of paper containing the seed phrase disappears and the investor is unable to recover their wallet.

In Scenario Three, the founder of a crypto startup trusts the organization’s chief operating officer to manage the company’s finances. In addition to the business’s bank and exchange accounts, the COO controls all private keys to the project’s digital asset wallets. After a heated argument with the founder and other team members, the chief operating officer resigns and refuses to provide access to the startup’s crypto wallets.

While the organization may regain control over its custody accounts, the COO cannot interact with digital asset assets because he or she has left with the private keys. In this case, a criminal investigation is the only reasonable path the startup can take to recover its assets. However, the case may take several years to conclude and success is not guaranteed.

The above are just a few examples of how experienced crypto users can lose access to their digital asset wallets. Other cases of lost crypto can include data corruption, hardware failures, malware, attacks, counterparty risks, mortality, and fraud.

Prevent users from getting locked out of their crypto wallets

If crypto investors have neither access to their private keys nor seed phrases, wallet recovery solutions are their only hope. However, in most cases, the chances of success are slim and many scam providers operate in this niche, asking for an upfront payment without providing any real service.

Therefore, a more effective alternative to wallet recovery services is a decentralized trust. When creating a decentralized trust, crypto investors designate a backup wallet in case something happens to their main wallet. Let’s say they accidentally misplace their private keys and initialization phrases and lose access to the digital assets stored in their main wallet.

In this case, after several months of inactivity, the decentralized trust’s recovery mechanism automatically transfers users’ assets from their main wallets to their backup wallets. Since investors have access to their backup wallets, they can now interact with cryptocurrency assets that would otherwise be considered lost.

You also don’t have to worry about losing funds due to the owner’s death. A decentralized trust can be structured to ensure that assets pass to heirs according to the terms and conditions set by the heirs.

The next step in the evolution of crypto wallets

With multi-signature technology, decentralized trusts require multiple private keys to sign transactions. This eliminates a single point of failure (like the COO of the crypto startup in Scenario Three), reduces the possibility of human error, and protects funds from unauthorized access.

Therefore, a decentralized trust is an excellent choice for decentralized autonomous organizations, distributed Web3 teams, non-profits, and other crypto organizations to efficiently manage their assets collectively. Business owners and DAO members can flexibly configure signing rights to secure the project’s assets and prevent misuse of funds.

Decentralized trusts, available at a fraction of the cost of their traditional counterparts, offer an effective solution for regaining access to lost wallets. As the next step in the evolution of crypto wallets, they have the potential to become popular solutions for storing cryptocurrencies. As more investors replace their old wallets with decentralized trusts, fewer digital assets will be lost to human error, fraud, attacks, counterparty risks, and single points of failure. Ultimately, this will help create a more secure and resilient crypto industry.

Ruslan Tugushev

Ruslan Tugushev is a seasoned entrepreneur and investor with over ten years of experience in business management and web development. He is the founder and CEO of UBD Network, a professional multi-signature platform designed to improve security and collaboration in the cryptocurrency space, and DeTrust Wallet. Ruslan has a strong background in venture capital, having previously founded a successful crowdfunding platform that helped blockchain startups raise funds. He was also the CEO of Tugush Capital Partners, a venture advisory firm focused on helping companies achieve investment-ready status, with a special focus on blockchain industries.