Many solutions of coin storage are available for crypto lovers. An overview of the options being available can be found here. However, nowadays the use of passphrases probably is the most used method to store crypto assets and is widely used by wallets, be it paper, hardware or software. It gives many advantages as it is very convenient to use. It also offers strong security when it comes to storing crypto assets. Indeed, it is virtually impossible to break.
Well… Impossible to break unless you’ve got the key! And there might be some situation where an attacker could get hold of it.
Specifically, we’re talking here about physical theft or even worse, mugging. How long would you keep your passphrase secure if you were threatened at gunpoint? Would you keep protecting your bitcoins if your life or one of the people you love were at risk? I know I wouldn’t keep my mouth shut for long. Call me a p*ssy.
Plausible deniability is a condition in which a subject can safely and believably deny knowledge of any particular truth. This can be done when the subject is unaware of the truth, or when the subject gives evidence of alternative truth.
Back to the (gun) point, if you’re threatened and forced to open your wallet, you can call for plausible deniability if you unlock a wallet, even though it’s not the one the attacker was looking for.
The idea is to be able to open 2 wallets with the same backup passphrase you’re keeping.
Wallet 1 is your dummy wallet, the one with the fewer funds, and that you might want to use for daily use if any. In any circumstances, you don’t keep a lot of coins on it.
Wallet 2 is your main wallet, the one with the most funds, and usually acting as cold storage.
So now, if you unlock wallet 2 before the eyes of the attacker, he will probably sweep it. However, there is no way for the attacker to know you store another wallet with much more funds. Indeed you have only one backup passphrase! This is our perfect case of plausible deniability.
How does it work?
Many wallets make it possible to encrypt the backup passphrase with a password. This password acts as some kind of two-factor seed phrase where both “something you have” and “something you know” are necessary to unlock your coins.
“something you have” would be the passphrase needed to unlock your wallet, often stored on paper; “something you need” would be the password used for encryption. In case a wrong password is used, it won’t give you up, as it’ll open another different wallet.
This password is often referred to as the “13th or 25th word” or “extension word” or even “seed extension”. This word could be a pin, a word, a complete phrase or a random string of characters. Each word you’ld input at this stage would open any set of addresses.
Note that this password shall never be stored in the same place as the 12/24-words passphrase, or you won’t be able to deny anything at gunpoint.