Originally published 5 October 2020. Reposted during holiday times to give our experts a break.
While cryptocurrencies have picked up a lot of steam, there are serious obstacles in the road ahead. Security remains an ongoing problem. Since 2011, hacks and thefts of digital assets have resulted in at least $9.8 billion in losses. From Binance and Bitpoint to Bithumb and Electrum, malicious actors targeted both small and large wallets. And despite companies improving their technologies, security problems are only getting worse.
Ilias Louis Hatzis is the Founder and CEO at Kryptonio
A cryptocurrency wallet is a piece of software that keeps track of the secret keys used to digitally sign cryptocurrency transactions for distributed ledgers. Because those keys are the only way to prove ownership of digital assets and to execute transactions that transfer them or change them in some way, they are a critical piece of the cryptocurrency ecosystem.
The problem of a “private key” exists from the first day of Bitcoin. Managing private keys is the Achilles heel of blockchain applications. The loss of a private key represents a single point of failure. Simply put, wallet private keys have a tendency to get lost. And once they’re lost, the Bitcoin or other crypto in your wallet is lost.
There are different available technologies that support user custody and recovery. The common alternatives are exchanges, multisig wallets, smart-contract wallets and even breaking up the private and storing its parts in different devices.
Using a self-managed private key, for most users, is far too complicated and a requires a certain responsibility. Most of us have heard nightmare stories of users losing their private key and consequently all of their crypto assets, never to be recovered. The problem with a long, top-secret alphanumeric string of characters is that it’s impossible to remember and easy to misplace.
Centralized services are a good solution from a user experience perspective, but most retain custody of user private keys, which users often access with a password, and don’t provide any insurance against theft. It is completely inappropriate from the side of counter-party risk, let alone that it contradicts the basic principles of cryptocurrency.
Multisig wallets is another good option, but you have to rely and depend on other people to access your digital assets. This approach is not simple. There is a level of complexity and in fact multisig wallets are rarely used by ordinary people. Also, few blockchains support multisig wallets.
Smart contract wallets is an option to safely store crypto. However, if the multisig wallet contract is vulnerable to attacks, everyone that uses it can lose their assets. For example, Parity’s multisig wallet was hacked two times in a period of six months. A lot of people lost their money, including Parity itself. When it comes to smart contract wallets, you have to pray that the source code is not full of bugs. Also your portfolio is limited by the Ethereum-based tokens.
Billions of dollars worth of crypto assets have been stolen using the very same cyber-bank robbery techniques. Current implementations of key management, where private keys are centrally maintained, negate the benefits of secure cryptographic access that they enable.
Advancements in custody technology for cryptocurrencies are creating new market opportunities. Until recently, there was a lack of both technologies and regulations addressing custody challenges, but new capabilities are on the rise.
Multiparty computation (MPC) technology looks like it’s ready for prime time. MPC is an approach for creation a truly keyless wallet. It uses clever and secure mathematical algorithms that can sign blockchain transactions without the use of a private key. Multiple parties, at least two, work together to sign a transaction based on a secure cryptographic operation. Basically, the idea is that the private key is not even generated. Instead secret shares are generated and distributed independently and are never stored together on a single device, when executing a transaction.
One of the greatest barriers to the widespread adoption of cryptocurrencies is custody: how digital assets are stored, secured, transferred and accessed in a decentralized environment.
The adoption of MPC could open the door for new business opportunities, as it reduces the risk of key management. Every new user in the market needs a way to safely store and move their digital assets. Institutional investors need a way to safeguard their assets without risk, just like they do with their cash, stocks and bonds.
To fully understand the opportunity, just do the math. The number of cryptocurrency wallets Is growing exponentially. A record 3.5 million crypto wallet app downloads were recorded in July 2020, representing an increase of 81% when compared to the same period last year. Wallets that simplify the key management process will capture the market.
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