NSEC = Secret Account Login Key in Damus settings?

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Yes.

And why does the badge page recommend using an extension? Why not just enter the NSEC for login? Less secure? Could the key leak?

Yes, you never want to enter your private key directly, since if it was compromised someone else would

have the same level of control over your account as you have, and there would be no way to get full control back

Yes, aka your privkey or private 🔑