Download TinyUmbrella (for Mac or Windows) http://thefirmwareumbrella.blogspot.com/

TinyUmbrella (TU for short) is a nifty little program, it can do many things but one of the main uses is to save your SHSHs. Usually, it is connected to Cydia as well so that it can recover SHSH that has been saved in Cydia but with the current problems with Cydia, you will need to save the SHSH locally. It's a small file but this file is extremely important.

Say that Apple comes out with iOS 4.4 and you/your friend/your girlfriend accidently upgraded to 4.4 and there is no jailbreak out for 4.4, then you can use TU in conjunction with the SHSH that you have saved locally to downgrade to 4.3.2 and then jailbreak that with redsn0w. Without the 4.3.2 SHSH, you will not be able to downgrade to 4.3.2 once the 4.4 is out. See why saving SHSH is important?

There are many instances where you will need a downgrade such as when Apple comes out with a higher firmware version and your iPhone dies or something went wrong with the phone. The only way to bring the phone back is to restore it to the latest iOS firmware (which, let's say for arguments sake is not jailbreakable at the moment), what do you do? You will need to downgrade and you will need to have the SHSH ready.

It doesn't hurt to save the SHSH, I save them all the time (even for my Ipad 2 even though there is no jailbreak for the iPad 2 at the moment coz you never know what firmware version the dev-team will be able to jailbreak in the future)

If you did not save the 4.2.1 SHSH when Apple was signing it, there is no way for you to save it now. Just use TU to save the 4.3.2 SHSH (your iPhone does not need to be on 4.3.2 to be able to save that version of the SHSH).

You will need to have 4.3.2 SHSH in the case when Apple upgrades the iOS to a higher version. It's basically a safety net because if anything happens to your iPhone, you know you can always restore it to the jailbreakable 4.3.2

it means u doesnt have 4.2.1 shsh due to the closure of the signature signing by apple

As I mentioned previously, you can only saved SHSHs that Apple are currently signing. At this moment, Apple is only signing 4.3.2/4.3.1 (which won't be for long) and EVENTHOUGH your iPhone is on 4.2.1, since Apple no longer signs those SHSH, then you will not be able to save the SHSH for 4.2.1

As long as you have saved at least ONE SHSHs of a firmware that is Jailbreakable, then you are fine. It just means that the option of downgrading to anything lower than 4.3.1 is not available to you.

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Added on April 21, 2011, 3:22 am
It depends. Do you want to upgrade? Are there any features in 4.3.1/4.3.2 that you want to have on your iPhone? I have an iPhone 4 and I really like the iTunes Library Sharing and Personal Hotspot Feature so that's one of the reason I upgraded. If you have no need for those features and your iPhone is okay at 4.2.1, I see no need to upgrade.

I'd go for 4.3.2 though if I were you. Just skip 4.3.1 entirely and go straight for 4.3.2. If you have  a locked set though, just be extra careful and you will need to wait for Pwanagetool or used Sn0wbreeze so that you don't upgrade the baseband.

You are correct. If you are currently on 4.2.1 and you do not have the 4.2.1 SHSH blobs saved in TU or Cydia, then if anything happens to your iPhone, you will not be able to restore it to 4.2.1. You can only restore it to the current firmware that Apple has released or to the firmware that you have SHSHs blobs saved (like the 4.3.2)

Yes, you can skip 4.3.1. You can just download the 4.3.2 IPSW and follow the redsn0w tutorial in iClarified for the iPhone 4. You do not need to worry about an unlock (means that you can allow for the baseband to be upgrade) as you have a factory unlocked iPhone 4.

You update via iTunes.