Quote from: Jazkal on June 28, 2011, 11:41:05 AM

http://en.wikipedia.org/wiki/Two-factor_authentication

Someone give me a client that I can use two-factor authentication with. Until then, all other methods are insecure to some extent or other.

I don't think you understand fully the problem two-factor authentication solves. It's impossible to create a client that uses two factor authentication, once you are "authenticated" to the local client and it proceeds to decript your wallet, your bitcoins are available to the attacker. What I am proposing is NOT two factor, but an embedded wallet that handles the private key operations and minimal user input using secure hardware. Using a pin to unlock the device is purely optional, to prevent from physical theft.

Two factor is usable for authenticating against PayPal/MtGox online wallets, assuming you trust them to handle security better than your own computer.

Quote from: JoelKatz on June 28, 2011, 12:36:21 PM

Two-factor authentication exacerbates the problem. Now, instead of one thing that can go wrong causing you to lose your bitcoins (loss of the wallet), there are three things -- loss of the wallet, loss of the password, and loss of the second factor.

The embedded wallet makes an encrypted backup each time you connect it to your computer. You can easily arrange online backup. The backup is encrypted with a key that you can read of the wallet's display, write on a piece of paper, and store it in a safe place.
Sure, you can loose that too, but it's a practical solution that actually works. Your solution "just keep your computer safe and make plenty of (safe) backups" is simply not practical for 90% of the people out there, because securing your computer has a tremendous learning curve. Securing a piece of paper on the other hand is something people do pretty well, see paper money.