Preventing the Next MtGox – Multi-Sig Readies Bitcoin for Primetime
MtGox will be remembered in the archives of Bitcoin much like Pets.com and Webvan are memorialized in the annals of Internet lore.
Conceived in 2007, MtGox was an abbreviation for “Magic: The Gathering Online Exchange”. That’s right. MtGox was created so users could trade Magic cards like one trades stocks, only later being repurposed to the Bitcoin exchange of recent infamy.
At its peak, MtGox was serving the vast majority of Bitcoin trading liquidity, with over 400,000 trades per month and $120 million USD monthly trading volume. But the service could not handle leadership position.
In 2013, as the price of Bitcoin climbed nearly 100X between January and November, evidence of MtGox’s leadership and technical deficits began to emerge. Bruised by denial of service attacks, legal disputes, and liquidity issues, the embattled exchange made decisions that eroded confidence such as halting fiat currency withdrawals in June 2013.
MtGox held a price premium over other exchanges up until the end.
Beneath these seeming growing pains at MtGox was a much darker, more dangerous threat: a foundational lack of security for Bitcoin holdings. This is a threat that continues to haunt the Bitcoin ecosystem.
The Dangers of Single Key Security
As a crypto-currency, Bitcoin relies on public key cryptography and the Elliptic Curve Digital Signature Algorithm (ECDSA). To create a Bitcoin address, you use software to generate a 256-bit private key, which in turn is used to generate a public key and a Bitcoin address. In layman’s terms, your Bitcoin address is like your bank account number; with that number I can send you money. And your private key is the authorization needed to send money from your bank account.
For the first 4 years of Bitcoin everyone has used Bitcoin addresses that are backed by a single private key. That means, if an attacker gets your private key, your money will be stolen.
To this day, the myriad of Bitcoin thefts and disruptions reported breathlessly in the news are almost universally caused by this single avenue of vulnerability. In November 2013, an Australian company was hacked and 4,100 bitcoins were stolen. In December, a Bloomberg reporter showed his paper wallet on TV and his funds were quickly swiped. In February 2014, the newly formed Silk Road 2 was hacked all bitcoins stolen with some users asserting it was an inside job.
And in the final chapter of MtGox, the company is rumored to have lost 850,000 bitcoins. On the same day MtGox took down its website, 85 Bitcoin wallets were compromised through a botnet malware attack.
So where do you store your private key? On a desktop wallet? In the cloud? In a hosted wallet? On a paper wallet? In your head? With an exchange?
None of these options are good enough. In every instance, a single private key is a single point of attack.
But there is a solution, and it’s called multi-sig.
Welcome to the Future: Multi-Sig Security
Multi-sig, or multi-signature, security is a relatively new concept in Bitcoin and very few companies have real-world implementations at this point. Check out BitGo (https://bitgo.com) to see multi-sig in action. BitGo has the world’s first multi-sig secure Bitcoin wallet and has been operating it since mid-2013.
Instead of using a single private key to authorize a Bitcoin transaction, multi-sig requires that you have a 2-of-3 multi-sig address. Using a native part of the Bitcoin protocol called P2SH, 3 private keys are generated at address creation, and any 2 of those can be used, in combination, to authorize a transaction. For further security, you distribute these 3 keys to 3 different parties. At BitGo, for example, one key is held by BitGo, one is controlled by the user, and a third is stored offline or with a custodian.
BitGo Secure Wallet has the security of cold storage combined with the ease of an online Bitcoin wallet.
We are familiar with this security construct in other contexts. Missile systems require 2 keys held by 2 different military personnel. Bank accounts have multiple signatories. Safe deposit boxes require 2 keys to open them, one held by the bank and one by the customer.
Now apply that concept to Bitcoin and think about how the MtGox security story might have played out differently if they had employed multi-sig.
Multi-sig changes the paradigm for Bitcoin exchanges. It is not necessary for an exchange to pool and hold all of its customer funds. Instead, an exchange can have an individual multi-sig wallet with every customer. The customer controls one key, the exchange controls a second key, and a third key is held by a neutral party – like the safe deposit box example – whose job is to authenticate and co-sign transactions.
This new approach prevents theft and provides a path for disaster recovery.
It has been asserted that MtGox’s servers were compromised and bitcoins stolen by outside attackers. In a multi-sig scenario, MtGox’s servers would only have 1 of 3 keys, which is not sufficient to sign any transaction. Therefore, an attacker who accessed the MtGox key would not be able to steal any bitcoins.
In March, MtGox shut down its website and its customers were unable to withdraw their bitcoins. It is questionable whether any of these funds will ever be recovered. Bitcoin serial entrepreneur Erik Voorhees wrote to the community in late February, “Personally, I had over 550 BTC in Gox. I will never get any of that back. If misery loves company, then we’ll be enjoying a grand feast today.”
If MtGox had employed multi-sig, then its customers would have had recourse. As the exchange started to tailspin, any customer could have withdrawn funds by simply signing a transaction with his key and asking the neutral third party to co-sign a transaction. MtGox would not need to be involved in the transaction at all.
Preventing the Next Goxxing
As an industry, it’s important for us to prevent the next “goxxing.” I propose there are three principles to follow:
- Keep Bitcoin holdings 100% on Blockchain – Anytime there is a pool of Bitcoin holdings off Blockchain means there is risk of theft, loss, or government seizure;
- Use multi-sig as a foundational security measure – Migrate every business model and technology platform from single key security to multi-sig; and
- Give the end user control of their own funds – Businesses do not need to hold bitcoins on behalf of their customers. Exchanges, escrow services, marketplaces, and nearly any service you can imagine can operate without also being a Bitcoin custodian. It’s a revolutionary concept, but so is Bitcoin!
When Pets.com and Webvan collapsed, many naysayers self-righteously reinforced their negative biases against the Internet. Well, what has happened? Nothing less than massive value creation by Internet companies like Google, Facebook, Twitter, and many others.
We are seeing a replay of these events with Bitcoin. MtGox is a relic of Bitcoin past. Naysayers want to call the exchange’s fall from grace an apocalyptic event. It’s not.
Multi-sig is the key to a secure Bitcoin future. Once mainstream consumers and institutions are able to easily and securely store and transfer Bitcoin, the full potential of the currency will be unleashed including incredible innovations that have yet to be imagined. It’s an exciting road ahead.
About the author: Will O’Brien is CEO & co-founder of BitGo, a leading security-as-a-service provider for Bitcoin and digital currency. BitGo offers the industry’s first multi-signature wallet to keep Bitcoin secure from theft and loss and provides a suite of services for Bitcoin portfolio management, corporate treasury, and enterprise enablement. Watch Money & Tech’s video interview with BitGo co-founders here.