Not your keys, not your Bitcoin

not-your-keys-not-your-bitcoin.pngCryptocurrency is a thriving and quietly eating away at the existing financial ecosystem. The cryptocurrency market has erupted into a $200 billion industry, sparking a wave of global disruption. Retail and institutional investors, like Paul Tudor Jones, have deepened their commitment to cryptocurrencies including Ethereum, Ripple (XRP), Stellar and a number of others across the industry. At the heart of cryptocurrency is a rich history of innovation, that goes back to the 80s with advances in cryptography. Today, there are more than 5,000 cryptocurrencies with innovative applications and use-cases. Could the growing economic fallout from the coronavirus pandemic be a catalyst for mass adoption? And what does that mean for most people that are clueless when it comes to the complexities of managing crypto wallets and private keys?

Ilias Louis Hatzis is the Founder and CEO at Mercato Blockchain AG.

There is plenty of evidence that shows the growing adoption of crypto. Over the last few months, crypto wallet downloads, trading volumes, and the use of cryptocurrencies to buy goods has exploded.

Since mid-March Bitcoin has been surging, with the price up about 80%. BRD, a cryptocurrencies digital wallet company, has been setting records for the number of downloads in recent weeks. Since March, BRD added 678,000 users in the U.S. alone.

Coinbase had record-breaking volumes amid the recent market sell-off. On March 12th, volumes on the Coinbase exchange increased by 280%, exceeding $1.1 billion. The next day, volumes set a record high for 2020, passing $1.5 billion. Square, which offers Bitcoin trading through its Cash App, has also seen record downloads during the pandemic. To make it even easier for its users, in May Square announced that customers would be able to set automatic recurring purchases of Bitcoin. Robinhood has offered its users the option to buy cryptocurrencies, since the winter of 2018. Mobile trading usage also skyrocketed during the pandemic. The startup raised $280 million in funding in May, giving it a valuation of more than $8 billion. Some crypto payment processors even experienced extreme growth, forcing them to shut down after payments increased beyond expectation.

On the other hand, the US. has enjoyed being the world’s financial center and the dollar at the core of the global financial system. But the US economy is currently in serious decline. In the second quarter of 2020, the US. issued $1 trillion and nearly $3 trillion in national debt. The American dream was never about guaranteed outcomes, but the pursuit of opportunities. Today, the American dream is much less shared than it was several decades ago. Ninety percent of the children born in 1940 ended up in higher income brackets than their parents, while only 40% of those born in 1980 manage to do the same. When the pace at which a country grows slows down, carrying heavy debts can be impossible to bear. The issuance of nearly $3 trillion in national debt will certainly allow the US to manage the current crisis, but it is clear that if enough investors, foreign and domestic, lose confidence in the country’s effectiveness, it’s advantage will disappear and people will turn to other alternatives. 

In the past three years, trust in Bitcoin has grown 29%. Tokenist recently published a report called “Comparing Public Bitcoin Adoption Rates in 2020 vs 2017.” The study’s findings give a comprehensive look at the cryptocurrency ecosystem between 2017 and now, showing that in the post-Covid-19 economy, trust in Bitcoin is growing.

It’s difficult to predict what will happen going forward, but when severe crises hit, big and transformative changes take place. Our existing monetary system does not work anymore. Over the last ten years, Bitcoin has shown that it could give us more control over our assets, provide faster and cheaper payments, and protect us against inflation.

Covid-19 has moved Bitcoin fast forwarded to a moment for broader adoption. But with this new found freedom, also comes great responsibility.

If you’ve never heard the term “Not your keys, not your Bitcoin”, let me repeat it, so it sinks in. If your crypto is stored in a wallet and you don’t have the private keys, is it really yours?

Bitcoin was created in response to existing money, that takes power away from a central authority, banks, and gives to the individual. Handing over control of your funds, your keys, to a third-party definitely goes against the philosophy that’s at the very core of cryptocurrency.

When the first cryptocurrency exchanges appeared in late 2010, a single private key was commonly used to control crypto funds. When Mark Karpeles sent 442,000 BTC between Mt. Gox wallets in 2011, it demonstrated the dangers of a single entity having custody of the single key. Having one individual in charge of thousands of customers’ assets is a recipe for disaster. This was reinforced again in 2018 when Quadriga CEO Gerald Cotten died, taking his private keys with him, and hanging 115,000 customers out to dry.

While crypto exchange custody has come a long way since the days of Mt. Gox, hot and cold wallet management still remains a delicate balancing act for exchanges.

We’ve seen things like multi-sig and assigning different keys to multiple parties. While multisig was a major step, exchange thefts still proliferated. Multisig cannot prevent exit scams from occurring. Moreover, with the emergence of smart contract-based networks and more complex scripting capabilities, hackers had more options to exploit.

Can we have our cake and eat it too? Can we have a system of multiple keys that are always separate and never meet each other, but the vault still has only one lock?

Yes, we can.

That is exactly what Threshold Signatures do. Threshold Signatures are based on the cryptography field of Multi-Party Computation (MPC). In a way, we can think of Threshold Signatures as the child of Secret Sharing Scheme and MultiSig, inheriting the best from each. A key property of threshold signatures is that the private key does not ever need to be reconstructed to sign a transaction. Even after signing a transaction, nobody learns any information about the private key that would allow them to produce signatures.

Considering the increasing number of hacks, thefts and losses, better security is what the industry needs. Using digital assets is hindered by clunky interfaces, slow confirmation times, low merchant adoption, and nearly always requires one to be a security expert in private key management. Threshold signatures help improve the user experience for those not as technically minded.

Also, a lot of people do not know what platforms or who they can trust. The current situation where a single rogue employee or a piece of malware can empty an organization’s funds in hot storage instantly, irreversibly, and anonymously is simply untenable.

For Bitcoin and cryptocurrencies to gain mainstream adoption, a breakthrough in security is needed and threshold signatures is exactly what the doctor ordered.

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