Bitcoin security remains a problem, but the solutions are arriving. Bitstamp's recent hot wallet theft shows that even experienced operators struggle to protect their funds. The good news: multisig ad
Bitcoin security remains a problem, but the solutions are arriving. Bitstamp's recent hot wallet theft shows that even experienced operators struggle to protect their funds. The good news: multisig addresses and hardware wallets are starting to change that.
The first obstacle is understanding what you own. Most people using Coinbase, Bitstamp, Circle, and similar services believe they hold bitcoins. They don't. Those accounts contain bitcoin IOUs—promises from companies, not the actual coins. Whoever controls the private key to an address owns the bitcoins attached to it.
The largest heists in bitcoin's history occurred at exchanges and online wallet services that pool bitcoins from thousands of users. Satoshi Nakamoto designed bitcoin to work differently. His white paper stated the purpose: "What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party."
Yet many people continue to entrust third parties with their coins, even after MtGox collapsed in early 2013. The proposed Winklevoss Twins Bitcoin ETF offers no insurance if bitcoins are stolen or lost. Circle stands as an exception among online wallet providers, offering insurance on both hot and cold wallets, except when users compromise their own passwords.
Protecting your own private keys is getting simpler. Hardware wallets like Trezor store keys offline while allowing transaction signatures on internet-connected devices. The wallet displays which address will receive bitcoins before you approve the transaction. Malware cannot force Trezor users to send coins to the wrong place.
Bitstamp switched to multisig addresses after its hack. The technology requires multiple signatures before transactions proceed. GreenAddress operates as an online wallet where the user and GreenAddress must both sign off on any send. If GreenAddress acts badly or disappears, the wallet reverts to the user's full control after a set time period. The service also includes daily spending limits and instant confirmations.
Individuals can use multisig too, setting their desktop and smartphone as co-signers. Bitcoin Authenticator is developing two-factor authentication based on this approach.
Users need to understand private key security and take responsibility for their keys. Hardware wallets and multisig must reach regular people. Trezor costs too much for most users, but Ledger is working on a cheaper smartcard-based alternative. More users taking control of their own keys and using these new tools will reduce large-scale thefts and strengthen the bitcoin network.
