A Secure and Convenient Way to Manage Your Cryptocurrencies
Cryptocurrency #wallets do not hold actual digital coins; instead, they contain secret key pairs (consisting of a public and private key) that authorize transactions on blockchain-distributed ledgers. The public key allows anyone to make payments to the wallet, but only the private key holder can access or transfer cryptocurrency from that wallet. The private key is the only way to prove ownership of digital assets, making it the most valuable possession for the wallet owner.
KEY MANAGEMENT SYSTEMS:
Protecting your private keys is essential. That is where key management systems (KMS) come in. KMS are a set of cryptographic protocols designed to ensure privacy, data integrity, identification, and authentication. As digital payments have become more advanced, so has the risk of cybercrime targeting them, which has led to the development of key management systems. There are various methods for managing cryptographic keys, but three of the most used for securing digital assets are Single-sig, Multi-sig, and #MPC. #MPC #wallets implement #MPC protocol for managing and securing the user key.
WHAT ARE #MPC #WALLETS?
An #MPC wallet is a crypto wallet requiring more than one participant to authorize transactions. It is called “multi-party computation” because the process of generating wallet keys and creating digital signatures is executed by different parties running a distributed computing protocol. #MPC is a cryptographic protocol that allows multiple parties to compute a function over their inputs while keeping them private. In cryptography, this is particularly useful for preserving the private key used to decrypt data or generate digital signatures.
#MPC #wallets remove the single point of failure by using a Threshold Signature Scheme (TSS). Under this paradigm, nodes or participating parties create and distribute shares of a private key such that no single party or machine controls the private key entirely — this process is called Distributed Key Generation (DKG).
In essence, MPC eliminates the existence of a complete key for the entire key lifecycle.
Multiparty computation (MPC) has become increasingly popular among custody providers, exchanges, and financial institutions as a solution for providing custody and shared custody services. This technology has gained traction recently due to its capabilities and potential for replacing Multisig wallets. MPC offers a more efficient and cost-effective alternative to Multisig wallets, allowing multiparty approval across all digital assets.
HOW DOES AN #MPC WALLET WORK?
Traditional crypto #wallets (e.g., MetaMask) have a single private key and a seed phrase to recover lost private keys. As the private key is required to authorize the movement of funds from a wallet, keeping it safe is important.
However, there are many issues with single key #wallets, primarily the single point of failure they create. If a user’s private key is lost or compromised, funds stored in the wallet may be stolen or remain inaccessible forever.
Single Point of Failure
#MPC #wallets attempt to solve the problems of traditional crypto #wallets by redundantly distributing ownership of a private key between n parties. Each party does not hold an individual private key per se; they only have a part of the key (called a shard or key share). To sign a transaction, all parties apply their key shares to the transaction—this is the only way to create a valid digital signature for that wallet.
With multi-party computation, those involved in key generation and signing never have to reveal their inputs. Thus, an attacker who manages to compromise a single key shard cannot transfer funds from an #MPC wallet without authorization. If all parties are simultaneously compromised, attackers can possibly hack an #MPC wallet.
Although #MPC #wallets are new in the cryptocurrency industry, #MPC has been studied for decades. Formally known as secure multi-party computation, #MPC technology creates the means for some parties (P1, P2,…, Pn) to compute the value of a function over some data f(D1, D2,…, Dn) while keeping the data D private.
The Millionaire's Problem, developed by Andrew Yao, was one of the first examples of multiparty computation in action. It involved three co-workers who wanted to determine which earned the most money without revealing their individual salaries. This problem can be represented as a mathematical relationship between a function over some inputs and its output as
y = f(Sal1, Sal2, Sal3) and F(Sal1, Sal2, Sal3) = max(Sal1, Sal2, Sal3)
where “Sal” represents each worker’s salary and their private inputs to the multiparty computation protocol.
HOW #MPC IS USED IN TSS (THRESHOLD SIGNATURE SCHEME)?
Threshold signature scheme will produce the same result as a Single-key Digital Signature Scheme; however, it will employ #MPC to establish an interactive multi-party protocol to generate private key shares and create a single digital signature. Let’s see the key and signature generation steps with an interactive #MPC protocol:
Key generation: A set of n parties interactively generate an m out of n sharing of the private key. This is done using direct generation in a shared manner and not locally. As a result, no subset smaller than m has any information about the key. A public key is also generated, which can be done by each party independently, using just their share of the private key.
Signature generation: A signature is generated only if m parties agree to sign the transaction. A signature cannot be generated by any subset of less than m parties.
Verification: The verification algorithm uses a public key together with the transaction to verify that the signature is valid. This step remains completely unchanged.
It is important to note that even though multiple inputs from independent parties are used in the process, only one private key and, consequently, a single signature is created in the end. Because of this, using threshold signatures can provide us with several benefits compared to regular digital signatures.
Before we talk about “Why #MPC”? Let’s go through the “Crypto Hacks of 2022.”
Cryptocurrency hacks in 2022 have resulted in billions of dollars of losses. Here are the five most significant breaches that we know about from 2022.
Ronin Network — $625 million
In March, the Ronin Network, a side chain supporting the blockchain-based game Axie Infinity, suffered a hack in which the perpetrator stole user funds totaling $625 million by using stolen private keys to make fake withdrawals, transferring hundreds of millions from the network. The hack went undetected for a week.
Wormhole Bridge — $325 million
In February, a hacker exploited vulnerabilities in the validation system of a cross-chain bridge called Wormhole to fraudulently create a significant amount of wrapped Ethereum (WETH), a token with a value tied to the Ethereum coin. The Wormhole protocol allows for the transfer of funds between various chains, including Ethereum (ETH). The hacker used the Wormhole to convert the WETH into ETH, stealing cryptocurrency worth approximately $325 million.
Nomad Bridge — $190 Million
In August, a cross-chain bridge attack occurred on the Nomad bridge, causing a loss of approximately $190 million in Bitcoin. The attack involved hackers exploiting a flaw in the protocol to withdraw more funds than they had deposited. Unlike other hacks on this list, this incident involved hundreds of individuals taking part, potentially acting on their own rather than as a coordinated group. The news of the exploit spread quickly, leading many individuals to try to take advantage of it.
Beanstalk Farms — $182 million
Beanstalk Farms is a stablecoin protocol based on Ethereum and uses a governance token called STALK. To transfer assets out of the protocol, approval from a majority of STALK holders was required. However, in April, a hacker obtained a majority position in STALK through the use of a flash loan (an extremely short-term crypto loan) and proposed a large transfer of funds, which they were able to approve with their STALK tokens. This resulted in the stablecoin crashing and causing total losses of $182 million, although the hacker is believed to have profited by around $80 million.
Wintermute — $162 million
In September, Wintermute, a crypto market maker, suffered a significant hack in which it lost $162 million. It is unknown how the attack occurred, but some security firms believe private keys were leaked or hacked using brute force. Some have speculated that the hack may have been an insider attack, though this has not been confirmed. #MPC #wallets provide a new method of securing cryptocurrency and reducing risks for individual investors and large custodians.
“#MPC #wallets offer a new way of securing cryptocurrency funds and reducing risks for average investors and large custodians. Already, #MPC technology has been adopted by key industry players, including ZenGo wallet and Fireblocks. #MPC technology is still in its early stages and is not yet widely adopted, but it has the potential to revolutionize the way we transact and share sensitive information.”
KEY BENEFITS OF #MPC #WALLETS
#MPC #wallets are protocol-agnostic and can work with most blockchains that implement the standard EdDSA/ECDSA signing algorithm.
#MPC #wallets offer cheaper transactions since transactions need only one signature. The compute-intensive process of signing data with key shares happens off-chain, which reduces the costs of processing transactions. Signatures computed off-chain do not incur network fees.
Mitigate the risks of private key theft
Traditional crypto #wallets are often insecure due to the reliance on a single private key for controlling funds. Attackers have evolved different strategies for gaining access to private keys (e.g., phishing, malware, and spoofing), resulting in a series of high-profile cases of compromised #wallets.
#MPC #wallets aren’t tied to a single private key but split private key shares across different locations, such as a server and a user’s device. Digital signatures authorizing transactions originating from a wallet are computed in a distributed manner; however, the private key is never fully reconstructed at any point in time. With no private key to steal, cryptocurrency thieves will find compromising #MPC #wallets more difficult.
One suggestion for keeping private key #wallets secure is keeping keys in cold storage (i.e., offline). Transactions are signed in a device disconnected from the Internet before being broadcast to the blockchain network. Since the private key is never stored in an online location (e.g., a remote server or a user’s browser), the possibility of private key theft reduces.
That said, cold storage can introduce inefficiencies in managing crypto assets. An exchange or institutional custodian that needs fast access to funds may find signing transactions offline and broadcast online too cumbersome.
#MPC #wallets, however, improve efficiency—private key shares can be kept online since it is infeasible for malicious actors to compromise a wallet by stealing a single key shard. Thus, #MPC #wallets can improve efficiency for everyday cryptocurrency users and prominent industry players without sacrificing security.
An #MPC wallet can provide greater transparency in managing digital assets. For example, in a corporate setting, an #MPC wallet could be used to ensure that multiple parties are required to authorize transactions, providing increased accountability, and reducing the risk of fraud.
Off-chain distributed signing enables the use of sophisticated governance structures customized to meet an organization's specific needs and regulatory requirements.
DIGITAL ASSET WALLET TYPES
1: Data Sharing: Organizations share the data without disclosing the actual data with each other to enhance their decision output based on data, and with MPC, new knowledge is created without disclosure of underlying data.
2: Enterprise-authorized signatories: Signer by processes/System - Signers can be based on roles within the org or predefined policies like KYC, AML, and Anti-Fraud. Also, the transaction confirmation can be defined based on the shares for the below process to get confirmed, the signature of any of them is enough (1/2) as the threshold requirement is 1 out of 2, but it should be approved by all the policies (3/3). The threshold for each level can be customized by the enterprises.
FEW OF EMERGING PLAYERS WITH #MPC OFFERINGS:
Overall, the adoption of #MPC #wallets is expected to grow as more individuals and businesses recognize the benefits of enhanced security and privacy in their digital transactions. While still in its early stages of development, this technology has the potential to revolutionize the way we handle financial transactions and protect our assets in the digital world.
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