What Are One-Time Passwords (OTP) and How Do They Work?

One of the biggest problems with passwords is that there are so many of them. Every app and device needs a unique password and every person has dozens of programs and applications to log into every day. Password managers go a long way in ensuring password compliance, but one-time passwords (OTP) technology has been increasingly used to help combat some of the problems with traditional passwords. 

What does OTP mean?

OTPs are temporary codes that are valid for only one login session or transaction. Unlike static passwords, which can be reused and are vulnerable to various attacks, OTPs offer a higher level of security by being unique for each authentication attempt.

When a user attempts to access a system or service, an OTP is generated and sent to them via a predetermined method, such as an SMS, email, or through an authenticator app. The user then enters this OTP along with their usual credentials to gain access. This method ensures that even if a hacker manages to steal a static password, they can’t without also having the corresponding OTP. 

Some organizations, like Affirm, have done away with the traditional user name and password login framework and only use OTPs; every time a customer wants to check their account, they use the phone number associated with their account and get a text with an OTP to use to log in. 

Types of One-Time Passwords

OTPs can be categorized based on how they are generated and validated. The three primary types are:

Time-based One-Time Passwords (TOTP)

TOTPs are generated using the current time and a shared secret key. This means that the OTP changes at regular intervals, typically every 30 seconds. This method ensures that each OTP is unique and time-bound, adding an extra layer of security.

Event-based One-Time Passwords (HOTP)

HOTPs are generated based on a counter that increments with each authentication attempt. The shared secret and the counter are used to generate the OTP. This type of OTP remains valid until it is used, making it suitable for scenarios where synchronization with time is challenging.

Challenge-based One-Time Passwords (COTP)

COTPs are generated in response to a specific challenge provided by the server. The user inputs the challenge into their OTP generator (such as a hardware token or an app), which then produces the corresponding OTP. This method is particularly secure as it ties the OTP to a specific authentication request.

How to Generate and Use One-Time Passwords

Generating and using OTPs is straightforward and can be adapted to different security needs and user preferences. Here are several common methods:

Using authenticator apps

Authenticator apps, such as LastPass Authenticator, generate OTPs based on a shared secret and the current time (for TOTP) or a counter (for HOTP). Users install the app on their smartphone and link it to their account by scanning a QR code. Each time they need to authenticate, they open the app to retrieve the current OTP and enter it along with their password.

Receiving OTPs via SMS

Another common method is to receive OTPs via SMS. When a user attempts to log in, the system sends an OTP to their registered mobile number. The user then enters this OTP to complete the authentication process. While convenient, this method might be less secure than others due to vulnerabilities in SMS communication, such as SIM swapping or interception.

Implementing hardware tokens

For environments requiring higher security, hardware tokens can be used. These are physical devices that generate OTP, like YubiKey and RSA SecurID. Users press a button on the device to display the current OTP, which they then enter to authenticate. Hardware tokens are highly secure because they are not susceptible to digital attacks.

Advantages of Using One-Time Passwords

Overall, one-time passwords are less risky than traditional static passwords, because they can’t be reused. Businesses that adopt OTPs can enhance security and improve operational efficiency.

Enhanced security

The primary advantage of OTPs is their enhanced security. By providing a unique, time-sensitive code for each login attempt, OTPs significantly reduce the risk of unauthorized access. This makes them an effective measure against common threats like phishing, keylogging, and password reuse attacks.

Protection against phishing attacks

Phishing attacks, where attackers trick individuals into providing sensitive information, are common; in 2023, phishing attacks accounted for 36% of all US data breaches. OTPs provide an effective defense against phishing. Since an OTP is valid for only a short period or a single transaction, even if an attacker manages to capture an OTP, it would be useless after its validity window expires. This temporary nature of OTPs significantly reduces the risk of unauthorized access.

Convenience and user experience

While enhancing security, OTPs also improve the user experience by reducing the need for users to remember complex passwords. Modern OTP systems integrate seamlessly with various authentication methods, offering users a fast, straightforward way to authenticate themselves. For instance, using an authenticator app on a smartphone, users can generate OTPs effortlessly. This combination of convenience and security makes OTPs an attractive solution for businesses and their employees.

Reducing the burden of IT management

OTPs simplify the IT management process by reducing the need for complex password policies and frequent password changes. Employees no longer have to remember or frequently update complicated passwords, which reduces the likelihood of password fatigue and related security risks.

Empowering employees

By adopting OTPs, businesses empower their employees to maintain proper password hygiene with minimal effort. The convenience of generating and using OTPs encourages users to follow security best practices, such as enabling multi-factor authentication (MFA) and avoiding password reuse.

Securing collaboration

OTPs offer another method to facilitate secure collaboration by ensuring that only authorized users can access sensitive information, even when working remotely or on different devices.

Best practices for One-Time Passwords

To maximize the benefits of OTPs, businesses should follow these best practices:

• Implement Multi-Factor Authentication (MFA): Combine OTPs with other authentication methods, like biometrics, to create a multi-layered defense.
• Choose reliable OTP methods: Use secure and trusted OTP generation methods, like authenticator apps or hardware tokens, to minimize vulnerabilities.
• Educate employees: Provide training and resources to help employees understand the importance of OTPs and how to use them effectively.

Summing Up One-Time Passwords With LastPass

Using LastPass, businesses can help streamline their password management processes, reduce the burden of IT management, and enhance overall security. By enabling OTPs, they can ensure that even if a password is compromised, unauthorized access is prevented, thereby safeguarding sensitive information. 

See all the ways that LastPass can significantly enhance your organization's security posture, reduce IT complexity, and empower your teams to maintain secure and efficient workflow by signing up for a free trial today.