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Proof Of Keys: A Critical Test For Bitcoin

Proof of Keys day was initially created as a test for exchanges and other third-party custodians — a way for individuals to ensure that third parties holding bitcoin weren’t operating as a fractional reserve.

Let’s face it: It’s likely that many third-party bitcoin custodians are doing just that, and Proof of Keys day is unlikely to change anything. It’s time for this Bitcoin holiday to grow beyond an adversarial test for exchanges. It’s time to evolve this day into an educational celebration of private keys, where we help Bitcoiners both new and old understand the importance of self custody and take that first step toward holding their own keys.

Why Are Private Keys So Interesting?

Private keys are one of the best technologies in existence for granting asymmetric power to individuals. The source of that power lies in ownership and control over data — whether that data is Bitcoin or a text message. Only the owner of the key which encrypted a piece of data can view or control it, and it’s practically impossible to break that control with technical brute force. 

For example, a Bitcoin private key is a random number between 1 and 2^256. That means that, on average, a computer would need to guess more numbers than the estimated number of atoms in the universe before it could guess the correct private key.

That is the power of private keys, and anyone can have that power. With the right tools in the hands of individuals, this technology is world changing.

Sounds like a nice story, but give me a practical reason why I should hold my own keys.

Even if you don’t care about the philosophical reasons for holding your own keys, there is a very practical and important reason why you should self custody your bitcoin. 

One of Bitcoin’s biggest strengths is its decentralization. The Bitcoin software is run by thousands of nodes and miners, and private keys are held by millions of individuals. Decentralization makes Bitcoin one of the most resilient technologies ever invented.

But what happens if most bitcoin owners decide that holding their own keys is too difficult, and they’d rather let a third party manage that for them? On a large enough scale, this can actually pose a systemic risk to the Bitcoin network as a whole.

Let’s say the governments of the world wake up one day and decide to ban Bitcoin. It will be much easier for them to carry out that ban if they only need to seize bitcoin from a few major exchanges and custodians. On the flip side, it’s nearly impossible to knock on the door of every person in the world and make them give up their bitcoin.

Today, it’s estimated that anywhere between 20 percent to 60 percent of all bitcoin is held by third parties such as exchanges. My cofounder at Casa, Jameson Lopp, wrote an excellent article analyzing the amount of bitcoin held by custodians. While this is a large range, even 20 percent is too high for my peace of mind.

Not everyone is legally allowed to self custody; many regulated institutions, for example, are required to use a custodian. But individuals are legally allowed to self custody, and not enough of them take advantage of this right. Too much bitcoin held by third parties is a systemic risk to the network, and we as a community (including custodians holding funds) have a responsibility to educate individuals and help them take ownership of their bitcoin keys.

Your 2021 resolution: Truly owning your money.

Proof of Keys day is a holiday unique to Bitcoiners, and it will always have its roots in our philosophy of “Don’t trust, verify” — as a test for exchanges holding customers’ bitcoin. Moving forward from this year, let’s evolve the purpose of Proof of Keys toward one focused on education. Let’s teach and welcome individuals to take that first step toward real ownership of their financial future. 

The success of Bitcoin depends on it.

This is a guest post by Nick Neuman. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

The post Proof Of Keys: A Critical Test For Bitcoin appeared first on Bitcoin Magazine.

Source: Bitcoin magazine

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We Must Solve Bitcoin’s Custody UX Problem

Twelve years is the blink of an eye in historical terms, but it’s an eternity in tech. Just look at the cellphone, which went from niche accessory to absolute necessity in under a decade. Still, new technologies don’t always soar immediately: it took a quarter of a century for the humble washing machine to reach even half of U.S. homes.

This Halloween marked the twelfth anniversary of Satoshi Nakamoto’s Bitcoin white paper. In that short time, Bitcoin has transformed the way we think about money, but it’s still a long way from mass adoption. As a result, we need to ask some uncomfortable questions about what’s holding Bitcoin back. 

What’s The Problem? The UX

In my mind, there’s no question that user experience (UX) has always been the biggest single obstacle to Bitcoin adoption. But not in the way you might think. 

UX is a slippery term: it means different things to different people in different contexts. With Bitcoin, for example, UX extends far beyond the intuitiveness of individual exchanges or wallets. Since we’re talking about people’s investment, security is a — the — crucial consideration in any discussion about UX. 

Bitcoin suffers from a usability problem that can’t simply be fixed with a new interface. This isn’t a technical error but a human one: the assumption that it’s safer to store coins with an exchange instead of keeping custody yourself. This can’t be fixed with a new user interface (UI); it requires a revolution in the way we think about Bitcoin security. 

In the early days, poor UX didn’t really matter, since Bitcoin platforms were mostly used by traders and speculators who had the technical chops to navigate complexity. But when ordinary people started dabbling in Bitcoin, a host of exchanges and trading platforms focused their attention on developing “consumer-grade” user experiences. Ironically, this was the moment where Bitcoin’s UX problems really began.

Where Did It All Go Wrong?

It’s not like we didn’t see this coming. The world’s first highly-publicized hack, of Mt. Gox in 2014, saw 24,000 people lose everything. But in the six years since, we’ve continued in the wrong direction on security. There’s not enough space here to detail the number of exchanges that have gone bust, been hacked or, like OKEx in October, lost access to customers’ keys after the single employee in charge of them was detained by law enforcement. 

In the first half of 2020 alone, blockchain analytics firm CipherTrace found that investors lost $1.4 billion worth of crypto, much of it from exchanges that suffered hacks or, sickeningly, committed fraud against their customers. What’s going wrong?

Instead of making it easy and intuitive for everyone to hold their own keys, the industry has focused on delivering a consumer-friendly, “full service” experiences where third parties control every aspect — including key custody.  

That may be a good starting point for the first-time user, since it stops them from making very basic security errors. But it still leaves you vulnerable to a range of threats, both from within and outside the exchange.  

In spite of these well-publicized catastrophes, our industry hasn’t yet turned its attention to developing a standard solution to this gaping, fundamental security flaw. In large part, that’s because it suits platforms to have their customers keep their coins on-exchange.

Making Security Simple

Early Bitcoin UX efforts focused on superficial issues and dismissed the deep problem of helping users own their private keys. They figured that solid UX for users to control their keys was an unwinnable battle and took it off the table. 

While that’s understandable, I believe it was a mistake. The whole ethos of Bitcoin is built on the idea of empowerment: to be your own bank, to control your own savings and to take charge of your own financial destiny. But in trying to make UX more seamless for non-technical customers, exchanges and custodial wallets have (perhaps unwittingly) discouraged self-sovereignty and opened the door for third-party risk. And it’s hard to imagine a worse experience than losing every satoshi of your investment.

Approachable end-user control of private keys is the holy grail of solving bitcoin UX, and it’s one that the industry has largely sidestepped. 

So, while many new Bitcoin users face a steep learning curve, they are not learning that old security models don’t apply. If you lose your keys, for example, you can’t just hit “password reset” — your coins are gone forever. This, in part, explains why exchanges are so keen to own the whole experience, including custody. 

But sacrificing security in favor of ease-of-use is a false choice. We should not underestimate the challenge, both from a technical point of view and in terms of design. But it’s quite possible to make it easy for users to keep custody of their keys, combining high security with great UX. The harder task is educating the coin-buying public about why self-custody is so important. But it’s well within our industry’s capabilities, if we only give it the priority it demands.    

In the next ten years, Bitcoin will take one of two trajectories: either a cellphone-style surge in adoption or the slow rise of the washing machine. It all depends on how quickly we solve Bitcoin’s biggest UX challenge: making self-custody simple.

This is a guest post by Nick Neuman. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

The post We Must Solve Bitcoin’s Custody UX Problem appeared first on Bitcoin Magazine.

Source: Bitcoin magazine

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Questions Remain Around The OCC Decision To Allow Banks To Custody Crypto

The recent Comptroller of the Currency (OCC) ruling that national banks and savings associations can provide cryptocurrency custody services to clients is one of the biggest milestones in the short but spectacular lifetime of digital currencies. Now that U.S. banks have the green light to begin custodying crypto, everybody knows that the rules have changed — we just don’t yet know exactly how.  

As the dust begins to settle, there are a number of important questions we need to ask. What is the thinking behind the OCC’s letter? Why now? And how long will new Bitcoin enthusiasts be happy to store their coins in a bank rather than self custodying?

Banking On Bitcoin? 

Whatever the motivation for this decision, it is good news for bitcoin and other digital currencies, since it represents a long-awaited legitimization. The U.S. government has been wary of digital currencies from the very beginning, but it appears their views are changing, and that can only be good for adoption.

Using a bank to custody coins makes sense for new users wanting to dip their toe into the world of Bitcoin. People immediately gain the peace of mind that a bank brand confers, and this is especially important for those who have always been interested in the concept of Bitcoin, but who never invested because they worried that digital currencies were unsafe or untrustworthy.

Historically, governments have done little to correct this negative perception, which is why the OCC letter is terrific news for all of us who care about Bitcoin. But I’m not convinced that bank custody will work out how the OCC expects.

If bitcoin were just another possession, it could sit quite happily in a bank safety deposit box, along with your heirlooms, jewelry and other precious items. But what makes this currency so valuable is precisely why it doesn’t make sense to keep it with the bank: the Bitcoin network is controlled by the users, and bitcoin itself can be held easily and directly by individuals. It’s not just that any bitcoin you own is yours and can’t be taken away by banks or governments. It’s that the whole system is decentralized: no one owns it, which means everybody does. 

So, while I expect many more people to adopt Bitcoin thanks to this change, it’s likely that bank custody will be, for many customers, nothing but a temporary stepping stone. The more these new users immerse themselves in crypto, the faster they will learn that its true value is less as a commodity and more to do with the empowerment it brings. When anybody can be their own bank simply with the phone in their pocket, why wouldn’t they choose that independence for at least some of their wealth?  

Capturing Coins

And so we come to the biggest question: why has the U.S. government made such a dramatic U-turn on crypto?

We’re not party to the inner discussions at the Treasury or OCC, but we can make an informed guess at the reasons for their decision.   

One possibility is that the government has realized that, of the big cryptocurrencies, bitcoin is the “coin that got away.” With Bitcoin, the genie is out of the bottle: the whole ecosystem is so decentralized, with so many miners and nodes, that it’s impossible for the government to control. Other coins and networks being built today are centralized enough that regulators can shut them down, or at least slow them down and keep them from ever reaching the critical mass that Bitcoin has achieved.

If they can’t shut Bitcoin down, why not try to gain as much control and visibility into the network as possible? Using the power of banks’ brands to encourage people to hold bitcoin in a way that gives the government some oversight and control over their coins would certainly be an attractive Plan B. The government failed to control Bitcoin before it got too big; now they’re trying to make lemonade.

In a famous essay on financialization for Harvard Business Review, Gautam Mukunda said that real power comes from changing the way people think, not forcing people to do what you want. Bitcoin is changing people’s minds. It’s just made the U.S. government change its thinking, too.

This is a guest post by Nick Neuman, CEO of Casa. Opinions expressed are entirely his own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

The post Questions Remain Around The OCC Decision To Allow Banks To Custody Crypto appeared first on Bitcoin Magazine.

Source: Bitcoin magazine

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Bitcoin: More Than an Inflation Hedge

In May, billionaire hedge fund manager Paul Tudor Jones of Tudor Investment Corp. announced in a letter to investors that his fund is buying bitcoin futures as a hedge against “The Great Monetary Inflation.” In his letter, he argued that the $3.9 trillion (6.6 percent of global GDP) printed by central banks since February has the potential to trigger widespread inflation, once the global economy rebounds from the shocks caused by COVID-19.

Bitcoin’s capped supply is one of its most well-known features, and it is regularly cited as a hedge against inflation caused by government money printing. 

Most people don’t know that Bitcoin has another attribute that acts as a hedge against a far larger risk. 

Bitcoin can be “self-custodied” — meaning the owner has full control and does not need to rely on any third party (such as a bank) to complete transactions. People inherently understand the value of self-custody, even in traditional assets. In times of risk, people seek to hold more cash and physical gold, because they grant the holder full control simply by being held. At the beginning of the COVID-19 crisis, physical gold actually sold out as people rushed to buy it. 

Self-custody of bitcoin is easier to achieve than the self-custody of either gold or cash. Physical settlement is cheap and efficient due to bitcoin being entirely digital, and it’s easy to cryptographically verify authenticity. All of this is much more difficult for gold, which is part of why bitcoin self-custody is so attractive.

Bitcoin held in self-custody runs on an entirely separate financial system than the traditional one, making it a systemic hedge. In other words, Bitcoin is not only a hedge against inflation, it’s a hedge against failure of modern financial infrastructure such as banks, clearing and settlement networks, foreign exchange markets and payment rails. Bitcoin held in derivatives or on exchanges is not held in self-custody, and therefore it doesn’t have the same systemic hedging properties.

Why not? Because bitcoin held with a custodian is subject to approvals by that custodian. If the custodian is an integrated part of the traditional financial system, the bitcoin it holds is part of the traditional financial system as well. Those coins can be frozen in times of market stress or seized by governments. The threat of seizure may be small today, but in a world where the value of Bitcoin increases significantly, like the Tudor letter predicts, that threat could increase alongside Bitcoin’s value.

Needless to say, Bitcoin can’t be a hedge against the system if a large financial institution that is part of the system is holding it. 

Is systemic risk actually worth worrying about? It’s more of a risk than most people think. Sovereign debt crises and currency failures often go hand in hand with times of high inflation, as fellow billionaire hedge fund manager Ray Dalio pointed out in his latest post, “The Changing Value of Money.” In recent sovereign debt crises, such as in Lebanon today or in Cyprus in 2013, assets have been both frozen and seized, not to mention lost outright in bank failures. Just a few weeks ago, the FDIC reminded U.S. citizens via a creepy video that it’s perfectly safe to keep your cash in the bank. 

These are uncertain times, and we aren’t sure whether current global fiscal policy will save us from this crisis, or carry us inexorably into a deeper one. But if you’re investing in bitcoin to hedge against the unknown, doesn’t it make sense to reap the benefits from all of it’s hedging attributes? If your answer is yes, it’s time to take advantage of self-custody.

This is a guest post by Nick Neuman, CEO of Casa. Opinions expressed are entirely his own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

The post Bitcoin: More Than an Inflation Hedge appeared first on Bitcoin Magazine.

Source: Bitcoin magazine