So, I have an idea for a secure, reasonably cheap "hardware wallet".

It's a keyfob-sized thing with a USB connector, a small display and a couple of buttons. You'd have it connected to your computer, and when you want to make a transaction, you'll get a window where you enter the amount, address and your password. Those three things are then sent to the keyfob. In its display it will say "send x BTC to 1addressbLahbLah ?", and you'd press the "accept" or the "reject" button. The (now signed) transaction is now sent back to the PC and broadcast on the network.

The keyfob would be powered by USB, controlled by a cheap microchip and would contain an encrypted version of your privkey (or possibly the paper wallet from Armory).

The advantage of doing this is that it would be very secure, as your privkey can not be extracted by normal means, and you have the final say over all transactions. It is also a lot faster and less distruptive than booting a live-cd every time you need to make a transaction, and cheaper than keeping an extra computer around.

Any comments/concerns are welcome.

Edit: for your chance at winning 3 BTC, see this post in the thread

Related:

Hardware Bitcoin wallet - a minimal Bitcoin wallet for embedded devices
 - http://bitcointalk.org/index.php?topic=78614.0

Smart card wallet, take 2
 - http://bitcointalk.org/index.php?topic=94119.0

Bitcoins on a Raspberry Pi
 - http://bitcointalk.org/index.php?topic=93724.0

Thank you Stephen Gornick
The first link is exactly what I meant.

That's the spirit

I don't know, though.

I am a self-taught programmer, but I can't do it alone. I'd need some help:

• A businessman to sell the idea and keep in touch with production facilities etc.
• An electrical engineer to design the thing itself.
• an extra software engineer/programmer for reviewing code and bounce ideas off on.

This is how I imagine it would look like:
http://www.blogcdn.com/www.engadget.com/media/2009/03/090304-ibmbankstick-03.jpg
Thanks to IBM for making me a prototype

Edit: A retail price point would probably be 12-15 USD, assuming about 1000 customers.

I like this idea

I like the idea, but I wonder how safe it truly is. Isn't it possible the wallet gets hacked, so that the micro-controller starts accepting/processing command it shouldn't?

There are a couple of ways:

• If your computer is already compromised when you install the wallet on the microcontroller (µc), then there is no way in theoretical hell you can make a secure wallet. The malware could copy the signals sent to the µc and let the attacker program a new one with the same wallet.
• If the µc was programmed poorly (that would be my resposibility, and it's why I request another programmer to audit my work), some malware might be able to send strange signals that would make the µc leak the key.
  It would be very unlikely, because the µc has very few responsibilities, so there iae less things to go wrong. Contrast this with a PC, where you have thousands of drivers that all need to play together in an absolutely massive puzzle.
  
• If I have programmed a backdoor into the µc / wallet uploading software, someone with knowledge of that backdoor could exploit it to steal your wallet. The backdoor could be there on purpose, or it could be some leftover from debugging the thing.
• If you have physical access to the µc (ie. you stole one and disassembled it), you can possibly extract the encrypted version of the wallet. You still need a password to decrypt the key and sign the transaction.

I might make it possible to install a new version of the software on the µc. That would open the µc to attack, but you'd have to install the new software on the keyfob first. You'd get this display on the keyfob:
You would also need the password for the wallet in order to update the software.

Consider making it completely unwriteable from the main USB interface. Or at the very least require setting it in a special mode from the built-in controls.

What would be somewhat cool would be to have some flash on there and have the PC software be on it as a read-only USB drive. Though that is a little more complex than what you are suggesting and might open some attach channels itself.

Though personally, I don't see much real need beyond the mobile apps that are around right now. But good luck.

Also, if you could get the hardware, consider an e-ink display. You could have the balance and the address (maybe as a QR code) even with the device unplugged.

I wouldn't worry about the update-ability - if something drastic changes, you get to sell new hardware. If you make it cheap enough it shouldn't be a problem (and sha2 isn't going anywhere anytime soon)

Thanks for the support and the replies, everyone. This is now a thing.

I need a name for this thing. So this thread is now a competition. Suggest a name for the thing, and if I pick yours, you win the 3 BTC I have in my wallet (minus tx fee). It should have a vacant .com address.

For the record, my own suggestion is The Hard Bit, for hardware bitcoin wallet. hardbit.com is taken, though