As the price of Bitcoin (BTC) crept up in recent months, it appears public interest in digital assets is once again on the rise. Newcomers to the sector these days have it far easier than those who joined in the earlier days. Since 2017, we have seen an inflow of institutional investment, increasing the availability of crypto derivatives, and a vast array of new exchanges, custodians and wallets entering the market.
However, the industry still lacks a fundamental capability, which is perhaps the most significant barrier to adoption for new users — a guarantee of fund security. Even now, in 2020, exchange hacks are still a problem, with Italian exchange Altsbit the latest to get hit. If users are savvy enough to put their funds into a separate wallet, a lack of effective private key security could mean they lose access to their funds. Just ask famous gold-bug Peter Schiff.
Overall, the risk of losing digital assets remains the sector’s biggest reputation problem.
Why is private key security such an issue for exchanges and custodians?
Many of the biggest exchanges and custodians have been around long enough now to know that private key security is paramount, so why is it still proving to be such an issue? One critical challenge is that exchanges and custodians often have to balance the trade-off between security and operational agility. They need to be able to meet user demands for withdrawals fast while keeping funds secure.
Many exchanges balance this trade-off by keeping the majority of user funds in more secure, cold wallets and only having a small amount of available balance in more vulnerable hot wallets. Most of the twelve exchange attacks that took place in 2019 were hot wallet attacks, netting hackers a total of over $280 million. But keeping most of the funds in a cold wallet means it takes a long time to access main funds if there is a high transaction volume.
BitMEX is a great example — it has a stellar security record, but only allows users to make withdrawals once per day. It is potentially more secure, but does not have a particularly user-friendly approach. Imagine if your bank only allowed you to take out your money once each day.
Perhaps the worst exchange security incident in recent memory is that of QuadrigaCX. Founder Gerald Cotten died, effectively locking access to all user funds because he was the only person with the exchange’s private keys. The incident led many to question why some kind of multisignature arrangement was not already in place.
The problem is that even if there had been, Cotten could still have been the sole owner of multiple private keys, meaning it would not have made any difference in this case. By itself, multisig is not a particularly effective security measure because it does not protect the keys themselves.
Even if the private keys are held by different individuals and a quorum method of validation is adopted, multisigs provide additional security concerns. The precise quorum structure is exposed to the verifier, and hence this can potentially leak company-sensitive information as to the quorum used by the exchange and which parties in the quorum are most active.
For that reason, many exchanges and custodians have resorted to using hardware security modules, or HSMs, to protect their private keys. An HSM is a piece of hardware used to store digital assets and keep private keys secure. HSMs are a security upgrade on multisig, but they are also the reason why exchanges and custodians continue to operate hot wallets. An HSM is not efficient enough to manage the volume of transactions that they both typically handle.
Is MPC the future of digital assets security?
Digital assets security is evolving, though, and both custodians and exchanges can now benefit from the speed and security of multiparty computation, or MPC solutions. MPC involves taking private keys, splitting them into multiple parts (called shares), and storing them on separate servers or other endpoints. When a crypto transaction is requested, it can be signed instantly without revealing the pieces nor bringing the shares back together.
A key refresh feature can be applied for additional security. If a hacker somehow manages to track down all of the shares, they would have only a short window of time to obtain every share before they are newly refreshed again. Therefore, MPC is possibly the most secure means of protecting cryptocurrencies and private keys available on the market today.
Because this solution is not a physical device, multiple signatories can be based in different locations and even offline. MPC-based platforms can enable users to specify different policies for different actions, and being software based, it enables elastic responses to customer demand. For example, it could stimulate transaction limits that are specific to particular cryptocurrencies.
Furthermore, it is capable of processing transactions at a pace that matches the high-speed requirements of a cryptocurrency exchange or the liquidity needed by custodians. Custodians can offer institutions a guarantee of the best-in-class security without compromising on usability, especially when in-custody trading solutions arise, according to a research piece released by the Bank of New York Mellon
A different experience for users
While the technology is still relatively new right now in the marketplace, it is based on over forty years of academic research on MPC. Thus, I believe it is only a matter of time before MPC becomes the industry standard for digital asset security. For individual users, this could provide a vastly improved onboarding experience. Today, crypto users have to manage their own wallet addresses and private keys. Considering that neither is particularly user-friendly, this represents a significant pain point.
When using an MPC-enabled wallet, a merchant or end user would be able to safely engage in transactions, with their private key handled in the background in a secure manner. They would not need to worry about losing their key, as it would be securely backed up into shared pieces. A merchant or end user could even specify which parties can use their key shares, involving independent third parties such as an insurer or approved custodian along with their wallet provider. The net result is a solution that maintains the spirit of trustlessness and decentralization as core tenets of the cryptocurrency movement.
This is how it should be. How many people use the internet every day? Yet, ask the average internet user what http means, and it is more than likely you will be met with a blank stare. Cryptocurrencies and other digital assets are here to stay, but to gain mass adoption the way the internet has, all the friction and barriers to entry need to be done away with. MPC offers the opportunity for crypto to shed its reputation as “unsafe” and create a seamless means of onboarding new users.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.