Bitcoin is based on a simple idea, that we can be our own bank. That idea might seem revolutionary and crazy, probably as crazy as the things we do now on Internet, that were science fiction before the Internet made them possible. (“hers’s to the crazy one’s…” link)
Because Bitcoin can be hacked, we’ve seen people build physical vaults in the Swiss Alps, like old-fashioned Wild West banks to store digital assets. Physical vaults to store digital assets… this hardly sounds like progress. In the digital era you need digital storage, not a bunker. certainly, this is not aligned with Bitcoin’s promise.
For Bitcoin to become a decentralized blockchain and achieve its revolutionary vision, we need to think out of the box and build something that is safe, yet simple to store and manage Bitcoin.
The future is being built on top of crypto wallets.
I am sure some of you remember the browser wars. The browser wars referred to a period of intense competition between Netscape and Microsoft over which web browser would dominate the market. They started in the mid-90s, when the world was just starting to come online. A lot was at stake, as the company which controlled the browser market could have a huge influence over its users. Search engines would bid to be the default search tool in the browser, while other companies would bid to be listed in the default set of preinstalled bookmarks that came with the browser. The browser was and still is a powerful gateway to the digital world.
Fast forward 25 years later, crypto wallets are the new gate keepers to future services. Crypto wallets are more than applications on a phone that hold your cryptocurrencies. They are future ecosystems that will enable access to a variety of services that include wealth management, trading, insurance and payments, identity and social media. Crypto wallets could end up being at least as important as the browser was for the web.
The most basic function of a crypto wallet is storing digital assets. 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, Bitcoin wallet private keys have a tendency to get lost. And once they’re lost, the Bitcoin in your wallet is lost.
So will digital wallets trigger mainstream adoption of Bitcoin?
Today’s crypto wallets have a range of capabilities, but the general idea of a crypto wallet is pretty simple. A crypto wallet stores the keys and addresses of wallets that live on the blockchains underlying each cryptocurrency. And wallets need to fulfill that basic promise well.
There are different technologies available that support user custody and recovery. The common alternatives are third-party custodians, multisig wallets, smart-contract wallets and even breaking up the private and storing the parts.
Using a self-managed private key, for most users, is far too complicated and a great 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.
While, third-party custodians look like a good solution from a user experience standpoint, most centralized services 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, very 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 come 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 is a technology ready for prime time. It uses clever and secure mathematical algorithms that can sign blockchain transactions without the use of a private key. Basically, the idea is that the private key is not even generated. Instead secrets are generated and distributed independently and when transactions need to be signed the secrets are used to compute a key, but without coming together on a single device.
Crypto’s wallet developers are in position to build simple and secure gateways to the decentralized web. The next stage for wallets will be to perform crucial functions with the ability to surf a directory of dApps, buy and sell tokens, manage collectibles, pay for things, verify identity and log onto social media sites, without ever leaving the app. We’re at an early stage now, one that is not well-defined, but crypto wallets are far more important than a browser or our mobile phone’s operating system.
At Kryptonio, we are working on a next generation wallet, a keyless bitcoin wallet that hides the complexity from the end user and provides a secure and simple non-custodial wallet experience.