Turbulence in the crypto industry in 2022 has left us with a renewed awareness of transparency and security. As we continue to move through 2023, it’s a great time to observe the efforts made in these two key areas, and how they have developed over the past few months. Especially given the fact that crypto traders and long-term HODLers alike have become more critical and outspoken of crypto exchanges, requiring them to share their proof-of-reserves in order to be more transparent, whilst also safeguarding their digital assets.
Based on this need, many crypto institutional investors and crypto trading platforms have been looking to partner with crypto custodians or equivalent services. Some have opted to invest further to set custody in-house, despite the increased cost to do so, while others explore different options and opportunities to enhance their asset security and transparency. In most, if not all cases, market participants will have come across two major types of mechanisms to safeguard their assets: Multi-Party-Computation (MPC), and Hardware Security Modules (HSM).
Despite many attempts to compare the two mechanisms to identify which one is “better”, it’s more important to find a suitable service using a specific mechanism based on requirements. It is essential to do your own research (DYOR) and select a service or solution right for you and your clients, customers and community.
Today, we will share what MPC is, how it works and identify what types of users would be best suited to use the wallets utilizing MPC.
In short, MPC is a cryptographic solution that allows multiple parties to be able to evaluate a computation without disclosing any private or sensitive data held by each party. To make this easier to understand, let’s take a look at the following example.
Assume that Alice, Bob, and Charlie are at a restaurant and one of them suggests that the person with the largest amount of Bitcoin at the moment should pay the bill. In order to identify the ‘result’, or the richest person in Bitcoin, the three of them would need to share information of their assets in their wallets. However, MPC enables them to compute the result without revealing such private information to each other.
MPC plays a key role in safeguarding sensitive information which, in the case of safeguarding digital assets, would be the ‘private key’. Unlike a public key, which is an address that allows you to receive transactions, a private key is a tool to verify that the address belongs to you. It has an astronomically large number: 256-character-long binary code, 64-digit hexadecimal code. Private keys are kept in a crypto wallet, which could be an online wallet on a mobile device, or some desktop software. These private keys can also be found in offline wallets within a physical vault.
Now that you have a better understanding of what role MPC plays in safeguarding digital assets, let’s kick things up a notch and explore how MPC works in the blockchain world in greater detail.
The below scenario demonstrates how MPC allows participants to maintain confidentiality while also allowing them to conduct transactions.
In an ideal scenario, there should be three (or more) parties such as ‘a client’, the ‘client’s solicitor’, and ‘a custodian’, who can safeguard the private key by utilizing MPC. The private will be split into three parts using ‘Key Sharding’ techniques such as Shamir’s Secret Sharing, Blakley’s Secret Sharing, information splitting, etc. These fragments (the key shards) will be distributed to each party. MPC will require 2 out of 3 parties to co-sign a transaction based on the set signature threshold. The transaction process will still be carried out without sharing the information included in each party’s private key shard.
There are various use cases that apply to MPC: consensus mechanisms, smart contracts, data privacy protection, distributed applications, and other diverse scenarios within the blockchain ecosystem.
Despite the advantages of risk mitigation through private key splitting and flexible threshold expansions, there are other risks to be aware of. Firstly, in the real world, it’s common for the signature threshold to be set to 2/2, which means two parties out of two are required to sign instead of two out of three. In terms of using custody services with MPC, the two parties could be a client and its custodian.
There is one major disadvantage to using MPC which is that it is still susceptible to a single point of failure, as the user also needs to implement the same level of security measures to keep their key shard safe. In short, the client has a shared responsibility to keep the key safe. Safeguarding your private key is essential as loss of the key will permanently lock your assets. As of 2021, of the existing 18.5 million Bitcoin, around 20 percent appears to be in lost or stranded wallets according to the crypto data firm Chainanalysis.
Unless users conduct robust and professional private key management measures, no matter how flawless MPC is, they can still lose their assets. In the past few years, some users have permanently lost their digital assets due to the misplacement of their private keys.
In light of this, we would like to provide the following suggestions on how to store and use private keys:
- Private key storage: Private key sharding should be stored in hardware wallets or other secure offline devices, and out of reach of others — as much as possible.
- Private key backup: The user should secure a backup private key. The storage device for the backup private key should have the same security measures as the original private key. However, generating too many backup keys is not recommended. The more backups there are, the greater risk of leakage. Additionally, the backup keys of the custodian and the client should be kept strictly separate. The user should not be in possession of the backup key belonging to the MPC custodian, as this would put them in possession of, and at risk of losing, the entire key, thus rendering the MPC futile.
- Private key refresh: The private key should be refreshed randomly from time to time. Routine refreshing is a general security measure to prevent the private key from being compromised. Irregular refreshing of the private key is a way to prevent hackers from figuring out the schedule of the refresh. This makes it more difficult for attackers to steal the private key.
- Private key use: The private key should be kept in an offline trusted execution environment (TEE) after being generated, especially while it’s not in use. Arm’s TEE solution and Intel’s SGX are some examples of TEE. Keeping the private key offline is required to mitigate possible risks of key leakage. While using the key, a multi-sig mechanism should be applied to enhance asset security. Multi-signature is a digital signing process that involves two or more users to sign transactions.
To sum up, MPC is suitable for users who can manage their private keys as securely as custodians. In other words, users who want to be free from such operational requirements in managing their private keys may find that alternative solutions are better suited for their needs.
When selecting a custodian, clients need to identify the pros and cons based on their security capabilities. Rather than just looking at which solution offers the most features, it’s more important to identify the right solution to fit your needs.
Cactus Custody’s warm and cold storage solutions utilize the industry’s highest security level Hardware Security Module (HSM), which we will discuss in our next article. The HSM is widely used in banking industries and ensures minimal operational requirements from the client’s end while also maintaining the highest security standards. Cactus Custody also utilizes the multi-signature mechanism with HSM, which requires 2 keys out of 4 keys kept separately in military-grade vaults located across 3 continents (United States, Singapore, Hong Kong, and Switzerland).
In addition, Cactus Custody is developing new ways to implement the MPC mechanism to integrate with its existing infrastructure. These changes will maximize the advantages and offset the disadvantages of HSM and MPC.
Stay tuned for more developments!
About Cactus Custody
Cactus Custody is the qualified institutional custodian brand of Matrixport. It is a Hong Kong Trust Company that meets the requirement and acts within regulatory and AML guidelines. Its mission is to provide the digital era with secure, transparent, and efficient institutional custody services. It’s built with enterprise-grade crypto management features ranging from safeguarding digital assets to providing secure access to the DeFi protocols and marketplaces. It provides services to 170+ renowned mining companies, mining pools, cloud mining platforms, exchanges, funds and OTC dealers.