Wallet Recovery and Inheritance

This article has three layers:

1. Layer 1: The Intuition: Loss and theft are on a seesaw
2. Layer 2: Real-World Use: The QuadrigaCX incident, various recovery solutions, and customer service impersonation scams
3. Layer 3: Sharding, social recovery, time-lock inheritance, and security design for recovery workflows

Layer 1: The Intuition

1.1 Loss and theft are on a seesaw

There is no perfect solution, only trade-offs based on your specific situation.

1.2 Three questions

1. I lost it: Phone lost, hardware wallet broken, or the recovery phrase paper soaked in water;
2. Something happened to me: Serious illness or accident, where family needs to take over;
3. Someone is impersonating me: A scammer claims, "I am the owner, I want to recover the funds."

Many solutions only address the 1st question, resulting in failure regarding the 3rd question.

Layer 2: Real-World Use

• QuadrigaCX (2019): The founder of a Canadian cryptocurrency exchange suddenly passed away. It was reported that only he held the keys to the cold wallets, leaving approximately 190 million CAD in customer assets inaccessible. Subsequent investigations revealed that a large amount of funds had already been misappropriated. This event became a classic case study of the "single point of failure" risk when one person holds the keys.
• Customer Service Impersonation Scams: One of the most common methods of stealing crypto. Scammers impersonate wallet or exchange customer service on social media, search ads, or Discord, requesting the recovery phrase under the guise of "helping you recover your wallet," "syncing your wallet," or "verifying your wallet." No legitimate service will ever ask for your recovery phrase.
• Comparison of Recovery Solutions:

Layer 3: Principles and Engineering

3.1 Sharding: Preventing single point of leakage and single point of loss

Using a $k$-of-$n$ threshold scheme (see "Shamir's Secret Sharing"), such as 2-of-3: one shard at home, one in a bank safe, and one with a trusted relative. Losing any single shard does not affect recovery, and stealing any single shard is useless.

Do not split your 24 words into "first 12 + last 12": each half leaks half of the entropy, and both halves are required, which simultaneously increases both the risk of leakage and loss.

3.2 Social recovery

A smart contract wallet records a set of guardian addresses and a threshold. The recovery process:

1. The user (or an impersonator) initiates a request to "change the owner to a new key";
2. Guardians confirm individually;
3. Enters a waiting period, during which the original owner can cancel;
4. The change takes effect after the waiting period ends.

Step 3 is crucial: it is the on-chain cooling-off period. Even if a scammer convinces enough guardians, the actual owner still has the opportunity to discover and cancel the request.

The choice of guardians also matters: they should be unlikely to be convinced by the same scammer simultaneously; it is better if they do not know each other to prevent collusion; guardians must also be aware that "someone will impersonate me to contact you."

3.3 Time-lock inheritance ("Dead man's switch")

Rule: "If the owner performs no operations for $T$ consecutive time units, the heir's key can access the assets."

• The owner performs a "check-in" operation (any transaction counts) every once in a while to reset the timer;
• $T$ is too short; a simple trip might trigger it accidentally; too long, and the heir has to wait too long.

Bitcoin can implement this using relative time-locks (OP_CHECKSEQUENCEVERIFY) in scripts; Ethereum uses smart contracts.

3.4 Security design principles for recovery workflows

3.5 Instructions for family members

No matter how good the technical solution is, it is useless if family members do not know it exists. A good set of instructions includes: what assets are held, in which wallets or exchanges, what items are needed for recovery, where they are located, whom to trust, and whom to be wary of ("Anyone claiming to be customer service and asking for a recovery phrase is a scammer"). The instructions themselves should not contain the recovery phrase.

Summary