Anyone who knows anything about crypto safety and security will have heard of the mantra “not your keys, not your coins”.
For those who really care about securing their crypto, it’s imperative to maintain control of your private key – a randomly generated string of letters and numbers that provides access to your crypto wallet. Those who don’t control the keys do not control their funds, as customers of the popular crypto exchange FTX recently found out. Anyone who leaves their crypto in an exchange account is essentially trusting that platform to hold onto their funds for them – and that clearly isn’t a good idea.
But as foolish as it is, people continue to trust cryptocurrency exchanges. That’s because so-called non-custodial wallets have indirectly caused the loss of an estimated $100 billion worth of Bitcoin alone, due to people losing their private key and being unable to access their funds.
It’s no joke, as Briton James Howells discovered back in 2013 when he accidentally threw away a hard drive containing Bitcoin that is now estimated to be worth $200 million. The private keys were saved on the same hard drive that is now buried in a landfill site, meaning that he has no way to recover his lost fortune.
It’s a dilemma that’s bad for crypto. With no easy system in place for people to retain control of their funds, the industry will probably never be able to achieve its goal of onboarding billions of people around the world into an alternative financial system.
However, it doesn’t have to be this way. There’s a misnomer in crypto that users have a straightforward choice between using a centralized exchange, which means entrusting their funds with a third-party, or a non-custodial wallet, where they retain the private key. Leaving your funds in a crypto exchange means giving up your control and freedom in return for the peace of mind that, if you somehow lose your password, you’ll still be able to recover it through email and access your funds. It’s a trade off though, because exchanges have shown time and time again that they can’t be trusted to manage their customer’s funds. The only alternative is to manage your private keys yourself, and run the risk of one day misplacing them and losing access to your funds forever.
Introducing the MPC Wallet: A Safer Option
What few people realize is that there’s actually a third option, which offers a much better way. It’s a relatively unknown solution called the Multi-Party Computation wallet and can be thought of as a kind of hybrid between the two above options.
MPC wallets are a viable solution that have already been adopted by institutional investors for some time already. Services such as Fireblocks, for instance, have been helping big-bucks investors retain safe custody of millions of dollars worth of crypto assets for years, and it’s about time that this technology has the same impact in the consumer space.
What is an MPC Wallet?
MPC wallets use some cryptographic wizardry to create a secure key management system that allows multiple parties to generate a new key, sign and verify transactions, securely and without any single point of failure.
The way they work is quite technical, but essentially what happens is that the private key is split into multiple pieces that are linked using cryptographic techniques. As such, the task of verifying a transaction is split into smaller parts that are completed by multiple, different parties. Once all of these individual parts have been completed, they can be combined to verify the final result. It’s an approach that provides greater security and anonymity to users.
The advantages of MPC wallets is that the user never has to deal with the private key. It means they can always access their wallet and the funds within it, and there’s no single point of failure that would enable hackers to access it.
What MPC Wallets Are There?
MPC wallets were traditionally only been available to institutions through a provider called Fireblocks. Its MPC wallet service essentially breaks up the private keys into multiple shards that are distributed between various parties, who must each verify a transaction before it can be confirmed.
The requirement for multiple parties to be involved meant that it was difficult to provide this kind of service to consumers, but that has changed with the availability of MPC wallets from Coinbase and ZenGo.
Coinbase introduced its MPC wallet earlier this year, allowing users to access a range of third-party dApps directly within the Coinbase applications. ZenGo, meanwhile, has actually been around for several years.
In both cases, the way it works is that the user retains a part of their private key, with Coinbase or ZenGo storing the other part and helping the user to verify transactions. In this way, the wallet provider is unable to access the user’s funds. The main benefit for users is that they don’t have to worry about losing their private key as they never actually see it.
Coinbase promises users that, even if they lose access to their device, the key to their wallet will remain safe and can be accessed with the company’s assistance through its live support channels. In the case of ZenGo, it relies on an encrypted biometric scan, email authorization and recovery software that’s installed on the user’s smartphone or laptop. By combining these technologies, ZenGo provides a simple way for users to access their wallet, without them ever having to worry about the private key.
Recoverability Encourages Adoption
The harsh reality is that it’s impossible to recover a traditional non-custodial wallet if you lose the private key. On the other hand, MPC wallets provide a familiar recovery experience, similar to the process of restoring access to a social media account.
This kind of recoverability capability is likely to be crucial going forward. With episodes like FTX, users have become acutely aware of the dangers of keeping their funds on an exchange. Yet the alternative of trying to securely store a private key somewhere and never losing it is not appealing. It’s fair to say that many people simply do not trust themselves to look after something that’s so important.
If the crypto industry is to onboard billions of users around the world, a safe and secure recovery method is absolutely a must-have. By providing a way for new users to hold assets without worrying about losing their private key, MPC is opening the door to crypto for millions of new users.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice