I am sure a few days after receiving your first paycheque; someone told you how important it is to “manage your money”. Earning an income is only one half of the equation; keeping the money and ensuring you have a larger capital stock for a rainy day is the second task you’re left to figure out on your own.
Today managing your money can involve something as simple as keeping it in an interest-bearing savings account or investing it in a host of assets like stocks, bonds and ETFs. Managing your money is centred around beating inflation and finding the best risk-reward profile for your money.
Since we’re so used to handing our money to third parties to manage our funds, we’ve never had to manage anything. How can we be responsible if we never have custody of our money? We’ve made third-party permission custody the norm, and very few think about the risks involved in this trade-off.
While some of us might hold a physical cash balance or precious metals, this is not the norm for most people in the developed world, and anyone who isn’t banked aspires to get into these circles and give up custody of their funds for the perceived benefits.
While fiat is all about handing over your funds to someone else, Bitcoin is about taking ownership, taking self custody and being genuinely responsible for managing your wealth. If you stuff it up, it’s all on you, there is no one to blame, no one to save you, and there’s no way to recover funds once they are lost.
It’s a lot to process and deal with and is enough for many people to want to avoid it and leave their Bitcoin with a third party instead.
Taking custody is an unfamiliar experience.
Bitcoin puts many of us in an uncomfortable position, a situation where you can only rely on yourself to guard your funds. We’re so used to institutions and governments providing protection at a cost we don’t know what it’s like to manage our money ourselves, and once you take that first step, it can be scary, isolating and leave you feeling anxious.
Self-custody gets easier with time and practice, but that feeling of anxiousness should never leave your side; it’s the key to avoiding making mistakes by becoming lazy or overconfident.
I can tell you from experience seven years on that I still sweat every time I restore a wallet or perform an on-chain transaction; it’s normal; you’re dealing with wealth you worked hard to acquire and wealth you aim to preserve for years to come.
While you can become more confident in the processes with time, self-custody comes with four realities you have to accept.
Loss of funds
Arguably the biggest hurdle to self-custody is the idea of losing your funds. If your bank fails, you might get a bailout, you might have deposit insurance, and you have someone else to blame other than yourself, and people take comfort in being able to point figures at others.
In Bitcoin, if you lose your private keys, you lose access to your Bitcoin for good, and you only have yourself to blame. This could happen if you forget your seed phrase, lose your hardware wallet or phrase, or have your computer hacked.
The reality is if you lose your Bitcoin, you will NEVER financially recover from it.
Risk of theft
If your Bitcoin is stored in a hot or cold wallet, it is vulnerable to theft if you don’t consider security practices. A hot wallet is a wallet that is connected to the internet, making it accessible to hackers. While a cold wallet is a physical device that can be nicked from you or forced to hand it over in a worst-case scenario.
Regulatory risks
Most people want to be law-abiding citizens, even if the laws make no sense. If a jurisdiction decides Bitcoin is illegal tomorrow, there would be regulatory risks associated with self-custody. For example, you may be required to report your Bitcoin holdings to the government or force redemption programs like the 6102 order, which people might feel pressured to submit to avoid prosecution. Just because funds are in self-custody doesn’t mean the custodian would be willing to hold on to the funds at any personal cost.
Technical complexity
Self-custody can be technically complex for the average person; while self-custody has been much easier over the years, people still need to see the gravity of what those 12 or 24 words represent. Users who self custody need to understand how to store private keys safely and securely, restore them and safely split them when needed.
Making self-custody easier
Earlier Bitcoin wallets were much harder to self custody, with the private key being a long string of text that wasn’t human readable, making it easier to leave characters out or make mistakes in saving or restoring a wallet. These issues became a lot easier when BIP39 rolled around, and we got the seed phrase storage system we have today that can generate a wallet from 12, 18 or 24 words that are human readable.
BIP39 wallets have become the standard and can be used in single and multi-signature formats. While BIP39 has brought down the barrier to managing your wallets, others feel there is room to simplify the process for users by adding more complexity on the backend.
This is where MPC wallets come in, the basis behind certain seedless wallet implementations, which make it easier for users to have a multi-sig-like wallet without all the complexity of managing multiple keys or devices.
What is MPC?
Multi-party computation (MPC) is a cryptographic protocol that allows multiple parties to jointly compute a function on their private data without revealing their individual inputs to each other. MPC is a powerful tool for enabling privacy-preserving collaboration between parties.
Here is an example of how MPC can be used. Suppose you and your friend want to find out who has the higher salary, but you don’t want to reveal your salaries to each other. You can use MPC to do this by each sharing your salary with a trusted third party, which then computes the highest salary without learning either of your salaries.
MPC has a wide range of applications, including:
- Privacy-preserving data analysis: MPC can be used to analyze data without revealing individual data points. This can be used for tasks such as medical research, financial fraud detection, and marketing analytics.
- Secure communication: MPC can be used to create secure channels for communication between parties. This can be used for tasks such as online voting, electronic contracts, and secure file sharing.
- Secure outsourcing: MPC can be used to outsource computations to a third party without revealing the input data. This can be used for cloud computing and big data analytics tasks.
MPC is a rapidly developing field, and new applications are constantly being discovered. As the technology matures, MPC is expected to play an increasingly important role in protecting privacy and enabling secure collaboration.
Here are some additional things to know about MPC:
- MPC is a complex and computationally demanding technology. However, recent advances have made it more practical to use in real-world applications.
- There are different types of MPC protocols, each with its own strengths and weaknesses, with a protocol choice depending on the specific application.
- MPC is still under development, and some security risks are associated.
What does MPC have to do with Bitcoin wallets?
MPC wallets differ from regular wallets such as single-key, multi-signature wallets. Single-key wallets rely on one private key that can be easily lost or stolen, while multi-signature wallets create separate keys and allow you to sign with a majority to perform a transaction.
MPC looks to meet in the middle and borrow from both concepts; with MPC, the private key is broken up into shares, encrypted, and divided among multiple parties. Each party will independently compute their part of the private key share they hold to produce a signature without revealing the encryption to the other parties.
This means there is never a time when the private key is formed in one place; instead, it exists in a fully “liquid” form and is compiled when it is needed.
A simple example would be to use MPC as a hybrid custody model where you would hold one shard, and your wallet provider could hold another shard on their server that is combined on the fly when you need to conduct a transaction.
In another example, you could have one shard in your hot wallet and another shard on an air-gapped signing device and compile using a QR code or provide a pre-signed signature from your device to be compiled with your MPC wallet.
MPC wallets can be used as permissioned tech
MPC wallets are not without their trade-offs, as they can also be used to support compliance with global regulations and industry standards for digital asset custody. Users that wish to engage with regulated entities can reveal their wallet key to comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements by verifying identities and sources of funds before initiating transactions.
They can also adhere to audit and reporting obligations by providing transparent records and logs of transactions, as well as follow industry best practices for security and governance through their policies and procedures, which helps feed chain surveillance and erode the privacy of users’ transactions and wealth.
MPC wallets can also be used to blacklist users or bar them from access to certain services if their key is flagged when compared to corruptible centralised databases.
MPC is a popular shitcoin solution
If you research MPC, you’ll find that most of its benefits are aimed at shitcoin use cases due to the nature of their market. MPC wallets are protocol-agnostic and maintain the signers’ privacy so they can be used to manage multi-coin wallets that communicate with different networks.
When using a popular smart contract chain, your wallet is constantly in communication with a host of protocols and websites. You’re using it for universal logins to dapps, signing transactions, staking coins, and authorising computation for smart contracts, and every time you perform an action like this, you could expose keys to a malicious actor.
The yield-chasing nature of shitcoins means you have to constantly engage with the network and protocols built on it to maintain your wealth, and this behaviour has seen many users’ wallets cleaned out over the years.
In order to solve the problem of exposing your keys as you play your casino games on-chain, having an MPC wallet will at least protect you against a wallet-draining attack, but it won’t protect you from a host of other issues like MEV and liquidity risk.
MPC will have its place in the custody ecosystem
Distributing keys or separating keys from operations is a concept that is going to get more attention in the future as the idea has plenty of merits. An example would be improving the use of the Lightning Network, as users could remain online but not expose their entire key to the internet like the Validating Lightning Signer or use LSPs that use a shared key to hold funds.
Overall, MPC is a promising technology with the potential to improve the way we collaborate, share data and perform financial transactions online. As the technology matures, we expect it to be used in a broader range of applications, especially in conjunction with IoT and AI communicating and transacting with one another, becoming more common.
MPC wallets can make it easier for first-time users to spin up a wallet that provides them with greater security for a specific problem like doxing your keys or losing your keys; it looks like a good option for Bitcoin onboarding and providing training wheels, but it’s not a silver bullet.
Whenever a new implementation or tool is added to the Bitcoin conversation, there are going to be those who look to push its limits. Where MPCs will find their niche is up for debate, and while some feel it could be a replacement for traditional multi-sig wallets, I personally don’t see the trade-off as worth it.
Do your own research.
If you want to learn more about MPC for Bitcoin, use this article as a jumping-off point and don’t trust what we say as the final say. Take the time to research, check out their official resources below or review other articles and videos tackling the topic.
