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Must Bitcoin abandon ideals of decentralization to achieve mass adoption?
Can cryptocurrencies grow and continue to maintain their commitment to the individuals who hold their keys? It increasingly seems that the answer is “no”. As blockchain security firm CertiK pointed out in a recent reportNearly half of the $503 million lost to cryptographic security breaches last quarter involved the compromise of private keys.
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To be fair, this statistic is probably skewed by some high-profile cases. Namely, the $112.5 million hack of Ripple co-founder and Executive Chairman Chris Larsen’s personal XRP wallets in January.
There were fewer total key compromises (26 incidents) than carpet thefts (34 incidents), though if you count phishing scams (83 incidents) – that’s definitely a matter of users keeping control of their coins – key management incidents account for a good majority of losses in the first quarter of 2024.
Of course, this is nothing new: people have been losing access to their “wallet.dat files” since the days when Bitcoiners were able to mine BTC on their desktops. A poor soul has been fighting for years to get permission to dig a landfill site in the UK after mistakenly throwing out a hard drive with 7,500 bitcoins.
People lose access to their keys in attacks like SIM swaps and social engineering exploits; forgetting their seed or passphrase; sometimes hardware simply fails, whether it’s hard drives or cold wallets; or things can get washed away in a natural disaster like a fire or flood, and yes, boating accidents sometimes happen.
The point is that key management is an unsolved problem in the cryptocurrency industry. This is why, as cryptocurrencies have expanded to more and more users, there have been more and more custody solutions that replace the challenges of properly managing keys – which is dangerous and difficult – with familiar security solutions that involve the use of passwords to access third-party services. Services.
“There is an overwhelming demand in the Bitcoin community that we need to scale, we need to scale, we need to scale,” said Craig Raw, founder of bitcoin desktop wallet Sparrow, in a panel discussion to Bitcoin Adoption Arnhem 2024.
A video recording of a four-minute clip featuring Raw from the event recently made the rounds on Crypto Twitter, in part because Raw convincingly exposes the tension between getting blockchains – particularly Bitcoin – into the hands of hundreds of millions of users and the challenges of maintaining decentralization.
“We’ve given up on a lot of things in Bitcoin because of this demand for growth. And I’ll just say that I don’t necessarily think that scaling is the end of everything that we should be thinking about,” he said.
Notably, the only way for cryptocurrencies to remain censorship-resistant is for people to keep their own keys. There’s an old idea in the Bitcoin community that “Uncle Jims” could run nodes for smaller groups of less technically inclined people, an idea that has been increasingly played down, Raw said.
“In the past there was no discussion that those are not your keys, nor your coins. I see an erosion in that term,” Raw said. “If you ask people today what ‘Uncle Jim’ means, it’s the person who holds bitcoin on behalf of the household. Do you see the difference between those two things?”
Gleb Zykov, chief technology officer of HashEx Blockchain Security, observed at his company own relationship of Q1 hacks says that “if anything, each incident shows the ongoing and sophisticated nature of the threats this industry faces,” suggesting that the risks of self-custody will only get more difficult.
I don’t have all the answers here, whether it is possible to maintain the precepts of decentralization while encouraging mass adoption. And Raw, apparently, doesn’t either: “If you start abandoning your ideals, you start losing those things that make Bitcoin unique.”
So it depends on what you value.