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Banking

Posted By Jessica Weisman-Pitts

Posted on January 29, 2025

Decentralization in Danger: Why Hardware Wallets Are Betraying Us All

By Zach Herbert, Cofounder and CEO, Foundation Devices

The decentralization revolution promised to reshape the world of finance and digital identity, offering users the power to control their assets and data with transparency and security. But when it comes to one key aspect of this vision—consumer hardware wallets—there’s a glaring problem. Despite manufacturers’ claims, these devices remain built on outdated technology and closed ecosystems that undermine the very principles they should be supporting.

At the heart of the issue lies the adoption of proprietary, "black-box" technology by many hardware wallets, particularly the most popular brands like Ledger. These wallets have made the conscious choice to rely on a closed, unverified technology stack, keeping users in the dark about the security and functionality of their own devices. In the world of decentralization, this is not only a major contradiction – it puts the entire revolution at risk.

Decentralization Betrayed

Decentralization represents a new way of thinking about trust that’s rooted in the belief that financial systems should not rest in the hands of a few central authorities, but in open, verifiable systems. Cryptocurrencies like Bitcoin encourage users to verify every transaction and examine the code, not put blind faith in intermediaries. But hardware wallets, especially those that follow closed-source models, betray this principle.

Devices like Ledger often present themselves as the gold standard for security. They promise to keep users' private keys and digital assets safe from online threats. However, the technology behind these wallets is built on legacy systems, like the same smart card technology used in bank cards. This technology was never designed for the world of digital assets and, while secure for its intended purposes, fails to meet the growing demands of the decentralized ecosystem.

The problem is not just the technology but the hidden nature of the device. Unlike open source systems that can be examined, audited, and improved by the community, hardware wallets typically operate within a closed, proprietary environment. How can we trust the tools we use to safeguard our wealth – and, increasingly, our digital identity – if they’re impossible to verify?

Innovation Withers in The Walled Garden

Another major flaw in many hardware wallets is their “walled garden” approach. In the early days of the internet, centralized companies like Google and Facebook created ecosystems where everything from user data to services was controlled by a few key players. Now, history is repeating, this time as farce, with wallet providers acting as gatekeepers to the ecosystem they control. To make matters worse, every application that interacts with these wallets often requires approval from the manufacturer. This creates a bottleneck for innovation, as only approved apps can operate on the wallet, stifling competition and creativity.

This is a stark contrast to the open source nature of cryptocurrencies, where new projects and functionalities evolve through community collaboration and transparent development. Hardware wallets that keep users within a closed system limit this natural progression, consolidating control in the hands of a few providers. The result is a centralized model that mirrors the very centralization we thought we’d left behind.

Moreover, the concentration of control in the hands of a few companies increases the vulnerability of the entire ecosystem by concentrating security risks. If these companies were ever compromised, the consequences would be disastrous for millions of users.

Embracing Open Source

The solution to these problems is both simple and radical: embrace open source technology. Just as decentralized networks like Bitcoin rely on open source protocols to ensure transparency and security, the tools we use to access and store digital assets must follow the same principles. Fortunately, we now have the tech to make this shift possible.

Next-generation hardware solutions, built on open source microkernel-based operating systems, already offer a secure, transparent, and flexible foundation for decentralized wallets. These systems enable anyone to inspect the security of the device, ensuring there are no hidden backdoors or vulnerabilities. Developers can freely create applications without requiring approval from a central authority, fostering innovation while maintaining the security and integrity of the entire ecosystem.

By embracing open source hardware and software, the industry can not only enhance security but also encourage the growth of a truly decentralized digital economy. Developers can build apps in isolated sandboxes, preventing malicious or compromised applications from affecting others. This approach supports the core values of decentralization: transparency, openness, and trust in the collective power of the community.

To transparency…and beyond

The decentralization revolution can only succeed if the tools we use to participate in it are built on the same principles of openness and transparency. Today’s hardware wallets are the complete antithesis of this goal. As the crypto ecosystem continues to expand, the need for truly secure and open devices becomes more urgent. The future of digital finance and self-sovereignty depends on the widespread adoption of open source solutions that enable security, innovation, and trust for all users. Only by opening the door to these new technologies can we hope to build a truly decentralized future.

Zach Herbert, Cofounder and CEO, Foundation Devices

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