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Distributed ledger technology has only scratched the surface of its potential, and bitcoin is in many ways putting these possibilities in the spotlight, so much so that it has sparked unprecedented global adoption.
Additionally, growing institutional buy-in is a force to be reckoned with, and the build-up of MicroStrategy is just one strong example of the accelerating pace of purchasing. CEO Michael Saylor has been a staunch supporter of corporate balance sheet additions and institutional acceptance, even convincing Elon Musk to add more than $ 1.5 billion of the seed cryptocurrency to Tesla’s treasury.
While bitcoin enthusiasts may view development as contradicting their perception of decentralization, in many ways, greater institutional buy-in may actually increase bitcoin’s appeal and, over time, its resilience. What can be lost for champions of decentralization and inclusiveness is the still steep learning curve of bitcoin that prevents their vision from fully materializing. Institutional investors may – surprisingly – hold the key to unlocking its potential by promoting better methods of asset custody, the Achilles heel of the current portfolio structure.
The storage conundrum
Problematic storage of digital assets has long tarnished Bitcoin’s reputation. Some estimates postulate that up to 3.7 million bitcoins out of the roughly 18.8 million currently mined are permanently lost due to forgotten secret keys, which is almost a quarter of a billion dollars at current prices. Whether it is the result of negligence, accident, theft or whatever, this staggering number highlights the true extent of the problem and how easy it is to lose a password.
Would institutional investors enter a market where the risk of total loss was so simple that an entire multi-million or billion dollar investment portfolio could be compromised by a single point of failure? Probably not. Rather, they would require robust digital asset security that is not necessarily widely available.
For example, you certainly don’t believe that Michael Saylor is the sole holder of the 24-word seed sentence for MicroStrategy’s portfolio. Imagine that he suddenly forgets the passphrase all at once and compromises the assets of the entire company. It will not happen. The company has likely recognized this glaring risk and has incorporated digital asset security measures that store private keys, restrict access, and facilitate recovery efforts if a worst-case scenario occurs.
The very complexity at the heart of Bitcoin’s design is anything but an obstacle, and in fact, that same complexity is the source of Bitcoin’s robust architecture. Yet the very complex issue of storage has been at the heart of many efforts to reverse this reality. Indeed, removing the single point of failure posed by human error is key to preventing more widespread permanent loss and ensuring the long-term resilience of bitcoin.
Functional resilience in the form of reduced complexity
Among the answers to the storage dilemma, vaults represent one of the many solutions offered by digital asset custodians, effectively forming an offline consensus mechanism for accessing locked cryptocurrency. Offline storage is convenient but imperfect nonetheless, primarily if your consensus mechanism relies on the physical presence of people to unlock the “vault” and take its cryptocurrency out of cold storage and bring it back online. Ensuring a 24-hour physical presence presents apparent hurdles. Thus, creating their own functional “safe” is possible but logistically difficult for institutional investors who need constant and immediate access.
An alternative to this physical custody option is the multisignature (multisig) wallet. With this wallet security model, each transaction requires multiple signatures from multiple parties, known as co-signers, to be processed. For example, when creating a multisig Electrum wallet, the number of co-signers must be selected as well as the number of co-signers who must sign the transactions to process them. For example, a wallet with four co-signers might require two co-signers to sign an expense transaction.
Each co-signer then generates a new seed for both types of seeds (Segwit or Legacy). Once generated, it is the responsibility of the co-signer to keep it safe (and not to share it with other co-signers). After confirming the seed, Electrum generates a Master Public Key (MPK) that must be shared with the wallet co-signers. Once all of the co-signers have all of the master public keys, the wallet can be created. When completed, the service will generate a wallet address, which requires the cooperation of co-signers to process all expense transactions from the wallet.
There are slight variations on this theme, like Specter Desktop, which allows users to list hardware devices like Trezor or Ledger S wallets as co-signers, requiring a certain quorum of devices to sign and send transactions. Yet some of the obstacles are similar to those presented by vaults. As the single point of failure issue of a single sign-on wallet is addressed, exploitable code vulnerabilities have emerged historically. Also, as teams change, signatures and permissions need to be updated, not to mention the availability element described earlier.
Even the idea of Hardware Security Modules (HSMs) was promoted, but eventually it brought the conversation back to the single point of failure. HSMs efficiently encrypt private keys and decrypt them for transactional use. While effective against theft, that doesn’t mean they can’t be compromised by an enterprising hacker and used to dump a wallet address. Their expenses are even greater, putting them beyond the reach of most regular Bitcoin HODLers.
One of the viable alternatives that can mitigate these different variables is multi-party computation (MPC). To avoid the single point of failure, MPC discards a single private key and replaces it with a process that involves at least three endpoints that do not share all of the secret keys. This enables a distributed signature consensus process to validate and sign transactions. Apart from reducing the risk of theft and hacking by distributing the storage of secret keys, one of the most important benefits is the modification of the process or the endpoints without requiring the consent of the parties with signing rights as in the storage models mentioned above.
According to ZenGo CMO Elad Bleistein, “MPC-powered crypto wallets don’t think a 24-word base phrase is viable for most humans and have incorporated this technology into their user experience. This means that only you can access your assets, but also that they are recoverable in the event of an error. “
Allaying institutional fears as a key
When assessing the track record of investment technology, institutional innovation ends up spilling over to the retail level. Institutional investors have the firepower and capital to develop and implement new solutions, which ultimately become the gold standard for other institutions and retail investors. This paradigm may ring true in cryptocurrency markets as well, and MPC solutions could herald a huge shift in storage methodologies.
MPC solutions effectively eliminate the single point of failure problem. Along with their growing track record and increased institutional interest, they can pave the way for internal storage models that invite broader institutional participation. Additionally, it can be a boon for individual HODLers who are looking for a more robust methodology to protect their private keys.
Together, these parts and systems can maintain the maximum amount of bitcoin in circulation, which in turn contributes to the overall resilience and longevity of the bitcoin cryptocurrency. How adoption evolves is a conundrum, but it’s hard to argue with the benefits of simpler and more accessible wallet key security and storage methodologies.
This is a guest article by Reuben Jackson. The opinions expressed are entirely theirs and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
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Sources 2/ https://bitcoinmagazine.com/business/institutional-accumulation-bitcoin-resilience The mention sources can contact us to remove/changing this article |
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