So you’re saying that to use crypto properly, I have to secure a physical object that grants irrevocable ownership of my wealth? That sounds bad.
Is there a way I can get my crypto held my an institution with SIPC insurance, the way I hold stocks at a brokerage, so I can outsource this issue to someone else who is backed by a government guarantee? (I obviously don’t expect them to guarantee the value of the crypto, just that the broker doesn’t lose it).
It's not about money, it's about power. If you hold a physical item, you have the maximum power over it as possible. If you want to entrust someone else with it, go ahead, but at the end of the day your access to the item will be subject to their whims and those of the greater political establishment / woke clergy / corrupt and powerful.
Nope, not at all. Your hardware wallet is useless without the bitcoin trust frameworks and the implicit agreement among many people that these particular bits on your hardware denote anything of value. Both of these are completely beyond your control and reliant on mechanisms not fully understood. It’s a system boundary question: yes, your wallet is under your control (how do you know what’s baked into the silicone or firmware, I do not know), but the whole system is not.
There is a huge amount of vested interest in persuading people bitcoin or ethereum require no trust in third parties. This is not true, as illustrated by this case: the person writing code that’s supposed to secure your money made incorrect assumptions about security and was thus robbed. If you own bitcoin, you necessarily need to trust this person and his colleagues are neither malicious nor stupid. Why that’s better than making the same assumptions about state institutions and banks is, to me, not clear.
>There is a huge amount of vested interest in persuading people bitcoin or ethereum require no trust in third parties.
It requires trust that third parties will act rationally in accordance with the incentives provided by the system, which is very different from trusting someone to custody assets for you.
At a larger level it requires trust that people will continue to see BTC/ETH/etc as being worth something, but that isn't a unique problem to blockchain based digital currency solutions.
Sure but is a rationally acting financial institution operating in line with the incentives of the system they operate not also inclined to do everything to keep your money safe?
I think the key phrasing here is "the incentives of the system they operate" — it isn't completely unfair to say that large financial institutions have had a hand not just in operating, but in creating the system. They act according to broader financial incentives and are constrained by regulations (so disincentives), and their time horizon is much longer than the tight feedback loops produced by a blockchain. Their disproportionate influence over the financial system coupled with a feedback loop in terms of consequences that, compared to blockchain, is glacially slow and basically toothless, effectively gives them a ton of latitude to do shady stuff with your money.
A hardware wallet is a physical device that stores some private keys in a tamper-proof secure element. Those private keys can be regenerated from a recovery phrase[1] which acts as a seed to regenerate the keys in a deterministic way.
The hardware device is typically itself secured by means of a pin. Without the pin, the device can’t be unlocked so can’t be used, too many incorrect pin attempts will brick the device.
So the answers to your questions are:
1) If you entrust it to a safe deposit box then if someone steals it, it is worthless without the pin.
2) If the safe is itself destroyed and with it the device (this is also the case if you have it in a safe deposit box and the depository is burned down or something) then the private keys (and transitively the funds) can still be recovered using the recovery phrase. So if you have securely stored your recovery phrase and are able to retrieve it even this kind of problem won’t cause the accounts to be lost.
So what people tend to recommend is choosing good secure storage for your pin, keeping reasonable physical care of the device, taking the recovery phrase and splitting it into parts and storing those parts separately. If one of the parts is destroyed then you will need to urgently replace the hardware wallet, move the funds and securely store the new recovery phrase because if not you don’t have a fallback if the hardware wallet is destroyed, but otherwise you are good.
Yes you absolutely do[1]. But that’s true of any wallet (software wallets also have the exact same recovery phrase system so for example if you lost the hardware wallet you could configure a software wallet by using the recovery phrase and get your crypto back).
Someone else using your recovery phrase to steal your private keys wouldn’t actually brick your hardware wallet. It would still work but obviously since the thing that it was there to secure (your keys) had been stolen that would be moot.
The subtext is that keeping all this stuff secure is hard and depending on your threat model may not be worthwhile. This is similar to the way in which for most people it makes sense to have a bank look after their funds. In the world of crypto though we’ve seen obvious examples of these centralised custodians being untrustworthy and since they are not regulated or FDIC insured or anything of that kind it’s much more risky.
[1] If you want the ability to recover your funds if the hardware device becomes inoperable, lost, stolen etc. If not you could just burn the recovery phrase so you don’t need to secure it.
I wonder, couldn't a such "wallet" be built on top of secure element (i.e on iOS/android)? Carrying around an additional device just for "wallet" features is very inconvenient.
Presumably yes, although some people prefer having a special-purpose device even if it is an extra thing to carry around. It does depend on your threat model I guess.
You're not holding anything in your wallet. It's just fancy login systen to a transaction system that is bitcoin.
It's no different from bank login in the end, once someone has it, it can be transferred at will.
Sure, the difference is that in banking system bank doesn't need your credentials to do stuff with money but even that when big crypto bois money are involved stops being immutable as DAO ethereum fork proves, fuck with important people money and nothing is sacred.
> It's no different from bank login in the end, once someone has it, it can be transferred at will.
Bank login credentials do not confer undisputed ownership of an account. If someone unauthorized gets ahold of them, the bank doesn't throw up its hands and say "welp, nothing we can do now, the account just belongs to the hacker".
At least partly because they're not allowed to do that because there are specific rules about it. If banks could just say "so sad, too bad", they absolutely would. I know someone who had to resort to the financial ombudsman to get their money after a hack because the "bank" (Revolut or Monzo) would not engage with them to even acknowledge anything had happened.
This thread is actually about security and custody, not valuation. Those are different issues, but we can talk about valuation.
My crypto has lost more value than any of my other investments. Since crypto (unlike stocks and bonds) doesn’t entitle me to any cash flows, and (unlike dollars) doesn’t allow me to repay any debts, why shouldn’t the value keep dropping?
What do you mean by fake dollars? We're talking about US dollars. Yes, US dollars do change in value (down), but overall they're more stable in terms of purchasing power than bitcoin.
Let's say I have a 3-of-5 multisig. That means there are 5 hardware wallets. I put a hardware wallet in my safe in my house, one in a bank deposit box, and 3 with 3 friends or relatives.
Now a thief needs to steal 3 of these to steal the coins. That's going to be hard for a thief to do. If a fire or natural disaster happens, it needs to destroy 3 wallets before I lose my money.
Yes, it's a low risk. Perfectly executed this is maybe a risk of one in ten million. So on a worldwide scale this means that it would happen every day, to someone.
But it won't be perfectly executed. Let's say you need to do a transaction while you're moving house. And maybe one of your relatives is in financial trouble.
You (probably) don't have the means to do what banks do, and hire an armored transport.
With collaborative custody companies like unchained, this is actually not as difficult to do right as you're making it seem.
Further, unlike an armored truck full of cash, security by obscurity is really easy here. That and for a short duration (say moving houses as you suggest) one could wipe a cold wallet clean and just remember a seed phrase. Personally, I don't have enough wealth to make this sort of maneuver at all worth it, but it's completely do-able.
I was once running a service that had redundant ISPs. None of them had had an outage in years. Then we needed to do a change, the first one ever that required disconnecting one of the ISPs. In the 4h window of our planned job the remaining ISP had its first outage that affected us. We had to apologize to many big name customers that depended on us.
Since then I don't believe in short SPOFs.
You could get hit in the head by a robber on your way moving your furniture, because the robber thinks you may be hauling high value stuff, and lose the passphrase. If you back it up on paper then the unguarded house may be broken into, and they steal the bag that had the paper passphrase.
Extremely unlikely that it'll happen to you, but extremely unlikely things happen all the time to someone.
I feel what you're saying is true, but not really something that should matter in a criticism of BTC when BTC is actually easier to secure than other dilution proof assets like gold.
3/5 multisig with collaborative custody would likely already be at least as safe as dollar checking accounts.
I would also recommend against keeping assets as gold in your basement.
> 3/5 multisig with collaborative custody would likely already be at least as safe as dollar checking accounts.
I think that's off by orders of magnitude. If the whole US did this then I'd expect thousands to screw it up every year.
"Just don't make any mistake, ever" doesn't scale. Not to more people, and not to any one person, given enough time.
It's like running a yellow light (and the occasional red, when you thought it'd be yellow a bit longer). You can go your entire life never being in an accident. But there are accidents every day because people run yellow lights.
But aren't we still pretending that crypto is a currency? So this means anytime I actually want to spend some of my own money, I need to go to the bank deposit box and also find at least one friend to help me out?
If we are all just taking these coins out of circulation to make them as hard as possible for anyone to access, including ourselves -- then what was the point of the entire thing again?
> If we are all just taking these coins out of circulation to make them as hard as possible for anyone to access, including ourselves -- then what was the point of the entire thing again?
> But aren't we still pretending that crypto is a currency?
These are such smug comments.
> So this means anytime I actually want to spend some of my own money, I need to go to the bank deposit box and also find at least one friend to help me out?
No, it means you have options to fully secure and own crypto assets in a way dollar bills or bank accounts never allowed. You don't have to do it this way, but if you actually have wealth, you should protect the larger portion of it.
If you have $1000 worth of BTC, just carry it in a hot wallet.
If you have $10000 probably put $9000 in a cold wallet and $1000 in a hot wallet for spending.
If you have $100000, you should probably use 2/3 or 3/5 multisig with a collaborative custody company like unchained capital.
If you have another order of magnitude more money than that you probably know better than myself how to hold your wealth.
In any of these cases, you have full control. Nobody can move your BTC without your sign-off. Your capital cannot be rehypothecated.
So in response to your smug question, yes lock away in deep dark vaults your wealth should you have enough to care about. For daily spending walk around using your hot wallet.
Your comp sci oriented since you're on HN, so if that still doesn't satisfy you, then think of it using caching layers. Keep the bulk of your wealth (should you have enough to justify it) in an L1 deep cold storage, then another smaller chunk in L2 cold storage in a single wallet, and finally L3 in a hot wallet for daily spending.
Another way to view it is if you want anonymity and sovereignty over your dollar bills, you have no choice but to secure it yourself -- probably in a safe.
If you're willing to let someone be a dollar custodian (banker) in today's system, they'll only keep a fractional reserve and lend it out. In actuality today they have other more complicated (but lesser) reserve requirements and without the FDIC bank runs would be commonplace. There's then a whole discussion about the solidity of the FDIC and whether it may collapse.
Fractional reserve systems create the banking cycle and is why we have booms and busts. Ponzi's and fractional reserve systems in crypto are why the crypto market just boomed and busted. There are a small number of legitimate crypto currencies and they're value is tied to the illegitimate ones simply due to crypto-crypto liquidity vs crypto-fiat liquidity.
In this thread nobody is taking a holistic view of what BTC provides.
Even comments that say we're not talking about valuation.
The problem is valuation is part of the reason BTC matters. Sure, you can get custodial security in dollars, but they'll be devalued for banking and governmental purposes.
BTC is sound money that's actually easier to store and use than Gold/Silver. That to me is the way to view it.
If these societal constructs fail what good are they?
Don't get me wrong, I think they're all probably decent as investments, buy they're a completely different asset class.
I put BTC in the Gold/Silver category in that it can be a hedge against societal issues. In this particular moment, I see BTC as a hedge against the ongoing de-dollarization and eventual inflation or plain lack of purchasing power that could cause.
I also see it as a means of censorship resistance.
Further BTC or any sufficiently distributed money is a way to limit bank/government power since they actually have to tax instead of minting new money.
> I have to secure a physical object that grants irrevocable ownership of my wealth
That's one way, but not the only one.
My preferred mean of storage is through a _vault_ smart contract, such as the "Gnosis safe".
It's basically a smart contract that you deploy, and send your assets to. You can then add some of your trusted friends as co-validators and require 2/3 validations for a withdrawal. You can also set a no-validation required threshold at $X/m for the day to day.
> I obviously don’t expect them to guarantee the value of the crypto, just that the broker doesn’t lose it
For the record, brokers rarely (if ever) store or guarantee client money.
Usually you have a custodian to hold your money (who will guarantee deposits, up to some limits), and your broker will unlock a credit line for you based on your collateral posted at the custodian.
There are custodians in crypto as well, "Paxos" and "Coinbase Custody" being the most well known. They will store your money on cold wallets with very strict guarantees (shamir split of the wallet keys among anonymous holders, strong entropy guarantees on key generation, proof of reserve, etc) and unlock it upon verifying your identity with real humans. It's costly though.
Multisig your life savings and backup the seed phrases on stainless steal washers. You can have as many signatures as you like and require whatever quorum you like too.
Maybe put some in Gold, Silver and Real Estate too.
Obviously you should never put everything in one basket.
Stock are to me a different class of investment from life savings type of stuff.
> To clarify, the idea is I need to keep my life savings in a fire-proof, theft-proof safe?
But yeah, you should definitely have a _portion_ of your life savings in a well hidden quality safe.
That said, you probably only need to put one key in a safe. Hide the other and give the third to a friend or custodial service like unchained capital.
For day to day use, transfer what you need to and from cold storage to hot wallets.
The more wealth you have the more security you need, and you should count governmental and institutional actors in you decisions or you will ignore threats from counterparty risk, inflation, confiscation, and taxation.
If you're keeping all your savings in crypto, I don't think a fire is your biggest risk. /s
In all seriousness, I completely agree. I'm not in crypto and this is part of the reason. There would be a huge influx of people like me if there weren't such a risk of theft (by individuals or platforms).
I use it because I view the dollar as a debt based slave system I'd prefer was replace with censureship resistant sound money. BTC is pretty okay at that, but my preference is currently Monero.
Most of crypto is used in Decentralized Finance, basically an open source version of the activities done on Wall Street. Very little is used for everyday goods (and you're right, why bother when credit cards give much better rewards)
Have you bought options with your credit card? Borrowed money against collateral? Purchased and collected revenue rights to music? Traded oil futures?
These are the kinds of things I'm doing frequently on Ethereum.
All of those things have better protection in traditional finance. Sure, they don't have credit card consumer protection, but they do have other protections.
Unless you're using blockchain financial instruments in order to do more blockchain stuff (the circular use case), the other options are better.
Trading oil futures doesn't need cryptocurrencies. And if you use it anyway then you expose yourself to additional risk not in traditional finance.
E.g. the difference between FTX shenanigans hurting investors (who are now being victim blamed for "not your keys, not your coin") and anyone financially reliant on Tether shenanigans (which includes all holders of BTC) is that Tether seems to be getting away with it, by so far not being subject to a liquidity check / bank run.
You can still always fall back to the government if disagreements occur. The advantage of smart contracts is they automate away the need for costly lawyers in the good case (which is most of the time). You don't need to pay so much overhead for "protection".
The benefit an open finance platform provides is you don't have to have some blessed middleman that conducts the trades or holds money. There are a LOT of these middlemen in finance and many of them are rent seekers abusing laws to their advantage, and working to add more laws to entrench their company as "part of the system".
Then there is the problem of bigger players using their power to "change the terms of the deal" and force smaller players to comply or spend years in court challenging them. When the terms are coded ahead of time and the platform is neutral there is no entity they can corrupt to get their way and the contract executes as specified.
Lastly these systems are transparent, anyone can monitor and report on companies doing dodgy things, rather than a few overworked government bureaucrats. It also makes everything composable with everything else, anyone can build their own Bloomberg terminal equivalent, which is amazing.
FTX isn't DeFi BTW, they were an unregulated opaque trading firm. They are exactly what is wrong with finance.
> You can still always fall back to the government if disagreements occur.
Does the government have an override mechanism on the blockchain? If yes then what was the point of blockchain. If no, then will the government fork the blockchain?
Does the government just put someone in prison until they give up the keys? Most countries don't have true "life in prison", and what are the implications for the wrongly convicted in the ones that do?
How would you invalidate an illegal smart contract where one party is the estate of someone who died, are in a coma, or gets put under conservatorship?
> The advantage of smart contracts is they automate away the need for costly lawyers in the good case (which is most of the time). You don't need to pay so much overhead for "protection".
Most of lawyer work is clarifying intent, and legal compliance. Smart contracts try to replace the former with coders, but without a common sense safety net. And without the knowledge about what contracts are even legal. As for compliance, that's still needed.
E.g. writing a smart contract to pay someone automatically needs to support garnishing a salary due to various court actions.
What lawyer work exactly becomes automated? Do you know lawyers, and what they spend time on? Every example of smart contracts seem to me to be incredibly arrogant, and even more ignorant about what lawyers do.
It has a smell of "I don't know what they do, which means it can't be hard. I can write a twitter clone in a weekend, so surely I can write a script to replace a lawyer".
You can write a "bucket shop" web app over a weekend, but you need a lawyer to tell you it's illegal, or under which circumstances it's illegal. That's the real "protection".
I mentioned FTX and Tether to point out that the industry is built on a house of cards. E.g. if Tether implodes then that affects your BTC. I'd say it's more likely that Tether implodes than that the US government implodes.
Since human beings are in physical forms (at least still in 21 century), physical form has been the most secure since beginning of human civilization. Every top secret NSA holds also relies on physical objects I think.
> So you’re saying that to use crypto properly, I have to secure a physical object that grants irrevocable ownership of my wealth? That sounds bad.
Yeah, that's how most things work in the physical world. If you want to secure a widget, then you need to "secure a physical object that grants irrevocable ownership" of it. Cryptocurrencies improve on this slightly by allowing you set up multisignature schemes, so you can get redundancy in the event of a loss.
>Is there a way I can get my crypto held my an institution with SIPC insurance, the way I hold stocks at a brokerage, so I can outsource this issue to someone else who is backed by a government guarantee?
If you want government guarantees, crypto might not be right for you.
> Yeah, that's how most things work in the physical world. If you want to secure a widget, then you need to "secure a physical object that grants irrevocable ownership" of it.
You can’t steal my house by obtaining the deed. You can’t steal my stock by obtaining the stock certificates. That’s not how it works. The vast majority of wealth in developed countries doesn’t rely on physical security to maintain ownership. We’ve collectively outsourced that function to the government and other institutions, so we don’t have to individually hire bodyguards to prevent criminals from taking possession of our homes and stealing our assets.
Most people only hold a relatively small amount of wealth in forms that can by physically stolen (eg. petty cash, electronics). This means that you only need to defend yourself against a $1000 crime (stealing your TV), which is a lot easier than defending against a $1M crime (stealing your house or 401k).
If crypto requires holding my wealth in a hardware wallet that can be stolen, that means I’m only going to be willing to invest the amount of wealth I would spend on a TV, not the kind of wealth I am going to allocate to stocks or bonds.
Granted, crypto has utility for people who can’t use the government-backed institutions, like criminals. And in some countries where the government will steal your money, it has broader appeal. I won’t argue with that.
When this stuff happens, you can engage in a legal process that has the power to get your property back. The process to recover from this can be slow and difficult. I acknowledge that this is a failure of the institutions involved, which can and should be fixed. However, the existence of these avenues for recovery acts as a strong deterrent that limits the frequency of such crimes. That’s why I am slightly worried about the local gang stealing my TV (and my safe full of Kruggerands) but not at all worried about them stealing my house.
When your crypto is stolen, the theft cannot be reversed, by design.
The same legal processes that can be used to recover funds stolen from your bank account or stocks stolen from your brokerage account can be used to recover cryptocurrency.
>When your crypto is stolen, the theft cannot be reversed, by design.
If someone sends you a phishing link, gets your info, logs into your online banking and sends all of your money overseas, that theft generally can't be reversed either. (You'll find that the CFPB recently updated their Reg E interpretation on this, but that interpretation isn't binding and directly contradicts decades of practice)
If you're a business and get hit by banking malware, you're similarly fucked.
Not for Bitcoin no. For other more advanced currencies (everything that supports smart contracts) rules likes these can be coded into the wallet.
You can have a rule that allows spending <$1k at known places, but anything over that has to have approval from 3/5 board members, or your manager etc. Any spending rule can be coded like this.
> The same legal processes that can be used to recover funds stolen from your bank account or stocks stolen from your brokerage account can be used to recover cryptocurrency.
If that is the case, then doesn't that destroy (at least) one of the basic principles of cryptocurrency that people constantly harp on?
A house? Maybe. Hasn't worked out for the guy in the BBC story so far.
Brokerage account hacked, stocks sold and money wired away? Your chances of recovery are extremely slim. There's pretty much no recourse once that money has passed through a few hops.
Can you go into more detail about how multisig helps? I assume one of the signatures is my hardware wallet. Who holds the other signature? Do they have SIPC insurance?
I briefly touched on it above, but it's basically that you can mint as many keys as you like and require quorum to transact.
2/3 and 3/5 are common.
This way it's hard for a theif to find enough keys to steal your BTC, and you get additional backups in case something happens to one or more of your keys.
>I have to secure a physical object that grants irrevocable ownership of my wealth?
Not really. Can be a file copied across dozens of public places that is well-encrypted (say AES256+Blowfish) using a key securely derived (say PBKDF2 with many iterations) from a random password you don't use anywhere else.
That said, if you do that, have a system that will drill you for that password weekly, or you will just forget it. And make sure this system can't be compromised to record your password as you type it.
This is what his colleague recommended. A cold wallet that is only worked with offline. It is on an encrypted file system and can be backed up. (passphrase protected)
I remember that Silk Road associated guy that was caught recently with 50000 BTC. I was wondering why he didn’t just encrypt his wallet?
There is no way crypto coin will work for society at large with such requirements.
This doesn't help at all, it's still a single point of failure without recourse. You might be subjected to rubber hose cryptography or any of the systems you use might be hacked and your password extracted.
Is there a way I can get my crypto held my an institution with SIPC insurance, the way I hold stocks at a brokerage, so I can outsource this issue to someone else who is backed by a government guarantee? (I obviously don’t expect them to guarantee the value of the crypto, just that the broker doesn’t lose it).