Institutional Bitcoin HODLing may seem contrary to decentralization and greater inclusivity, but it could be the harbinger of better security for digital assets.
Distributed ledger technology has only scratched the surface of its potential, and Bitcoin is putting these opportunities in the spotlight in many ways, causing it to spark unprecedented global adoption.
Additionally, institutional adoption is expected to grow, and the MicroStrategy accumulation is just one strong example of the accelerating pace of buying. CEO Michael Saylor was a strong proponent of corporate balance sheet addition and institutional acceptance, even convincing Elon Musk to add more than $ 1.5 billion of the groundbreaking cryptocurrency to Tesla’s Treasury.
While Bitcoin enthusiasts may view the development as contradicting their perception of decentralization, a stronger institutional embrace can in many ways make Bitcoin more attractive and, over time, its resilience. What could be lost with the decentralization and inclusivity champions is Bitcoin’s still steep learning curve, which is preventing their vision from being fully realized. Surprisingly, institutional investors could hold the key to unlocking its potential by promoting better asset safekeeping methods, the Achilles’ heel of the current wallet structure.
The memory puzzle
The problematic storage of digital assets has long harmed Bitcoin’s reputation. Some estimates assume that of the currently around 18.8 million Bitcoins up to 3.7 million Bitcoins will be permanently lost due to forgotten secret keys, which corresponds to almost a quarter of a billion dollars at today’s prices. Whether through negligence, accident, theft or otherwise, this amazing number shows the real scope of the problem and how easy it is to misplace a password.
Would institutional investors enter a market where risk of total loss would be so effortless that an entire investment portfolio of millions or billions could be jeopardized by a single point of failure? Probably not. If anything, they would require robust digital asset security that is not necessarily widely available.
For example, you certainly don’t think Michael Saylor is the sole holder of the 24-word seed phrase for MicroStrategy’s wallet. Imagine suddenly forgetting the passphrase in one fell swoop and compromising the entire existence of the company. This won’t happen. The company has likely recognized this blatant risk and implemented security measures for digital assets that store private keys, restrict access, and facilitate recovery efforts if the worst-case scenario occurs.
The complexity at the heart of Bitcoin design is far from an obstacle, and in fact, the same complexity is the source of Bitcoin’s robust architecture. However, the highly complex storage matter has been the focus of many efforts to reverse this reality. In fact, eliminating the single point of failure caused by human error is vital to preventing more widespread permanent loss and ensuring Bitcoin’s long-term resilience.
Functional resilience in the form of reduced complexity
Among the answers to the storage problem, vaults are one of the many solutions offered by digital asset custodians and effectively form an offline consensus mechanism for accessing blocked cryptocurrencies. Offline storage is practical, but still flawed, especially if your consensus mechanism relies on people being physically present to unlock the “vault” and bring your own cryptocurrency out of cold storage and back online. Ensuring a 24-hour presence is an obvious obstacle. Accordingly, creating your own functional “vault” is possible, but logistically difficult for institutional investors who need constant and immediate access.
An alternative to this physical storage option is the multi-signature (multisig) wallet. Through this wallet security model, each transaction requires multiple signatures from multiple parties known as co-signers to process. For example, when creating an Electrum multisig wallet, the number of co-signers must be selected along with the number of co-signers who must sign transactions in order to process them. For example, a wallet with four co-signers may require two co-signers to sign an issue transaction.
Each co-signer then generates a new seed for the two seed types (Segwit or Legacy). Once created, it is the co-signer’s responsibility to keep it safe (and not share it with other co-signers). After confirming the seed, Electrum generates a Master Public Key (MPK) that should be shared with the wallet co-signers. Once all co-signers have all public master keys, the wallet can be created. Upon completion, the service will generate a wallet address that will require the collaboration of co-signers to process all spending 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, which requires a certain quorum of devices to sign and send transactions. Still, some of the hurdles are similar to those of vaults. While the single point of failure problem of a single signature wallet is being addressed, exploitable code vulnerabilities have occurred in the past. In addition, signatures and authorizations have to be updated when the team changes, not to mention the availability element described above.
Even the idea of hardware security modules (HSMs) was promoted, but that ultimately leads the conversation back to the single point of failure. HSMs effectively encrypt private keys and decrypt them for transactional use. While they’re effective against theft, that doesn’t mean they can’t be compromised and used to empty a wallet address by an enterprising hacker. Their cost is even greater, as they are inaccessible to most common Bitcoin HODLers.
One of the viable alternatives that can mitigate these disparate variables is multiparty computing (MPC). To avoid the single point of failure, MPC eliminates a single private key and replaces it with a process that includes at least three endpoints that do not share all of the secret keys. This enables a distributed signature consensus process for validating and signing transactions. In addition to reducing the risk of theft and hacking by distributing secret key stores, one of the key benefits is changing the process or endpoints without requiring the consent of the parties with signature rights, as in the storage models mentioned above.
According to ZenGo CMO Elad Pencil Stein, “MPC-powered crypto wallets don’t believe a 24-word seed phrase is workable for most people and have built this technology into their user experience. This means that only you can access your assets, but also that they can be recovered in the event of a failure. “
Breaking down institutional fears as the key
In evaluating the investment technology’s historic track record, institutional innovation eventually seeps through to the retail level. Institutional investors have the firepower and capital to develop and implement novel solutions that will ultimately become the gold standard for other institutions and retail investors. This paradigm could apply to the cryptocurrency markets as well, and MPC solutions could usher in a huge shift in storage methods.
MPC solutions effectively eliminate the single point of failure problem. In addition to their growing track record and increased institutional interest, they can pave the way for in-house storage models that invite wider institutional involvement. Additionally, it can be a boon to individual HODLers looking for a more robust method of protecting their private keys.
Together, these parties and systems can keep the maximum amount of Bitcoin in circulation, which in turn contributes to the overall resilience and longevity of the Bitcoin cryptocurrency. How adoption develops is unclear, but it is difficult to argue against the advantages of simpler and more accessible methods of securing and storing wallet keys.
This is a guest post by Reuben Jackson. The opinions expressed are solely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.