July 11, 2021
The crypto market is unforgiving. Coins and tokens are lost, stolen, and accidentally transferred to nonexistent addresses all the time.
To highlight just a few recent news stories: $10 million worth of BTC were sent to customers by cryptocurrency lender BlockFi in a bungled promotion, $75 million worth of ETH were allegedly lost by custodial company Fireblocks (the company denies fault), and a German programmer lost his password to a $220 million fortune.
These events are far from irregular in the cryptocurrency ecosystem, and they bring to mind an interesting question central to the whole concept of decentralized currency: is true financial independence worth the risk when the consequence is that there’s no recourse for lost money? Is it possible to have our cake and eat it too?
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Anonymity or transparency?
To put things simply, cryptocurrencies are digital tokens stored at online addresses which are open to public view. One example of such an address is “1Ez69SnzzmePmZX3WpEzMKTrcBF2gpNQ55” – enter this into a search engine and you’ll be able to see all the transactions made into and out of this location.
The intention of cryptocurrency is to maintain the anonymity of the user, although it is more accurate to call the mechanism pseudonymous. That is, we can see all the activity of wallet 1Ez69SnzzmePmZX3WpEzMKTrcBF2gpNQ55, but we don’t know who it belongs to. Well, actually in this case we do because it is a famous wallet known to be owned by the US Marshall Service, but you understand the point.
Access to a wallet is gained by a private key, created along with the public address. It is not possible to derive the key from the address, or vice versa. Users are also provided with a 12-25-word recovery phrase, or ‘seed’, but that’s it.
The overall intention is to protect the identity of the user. This feature is what attracted the early adopters to Bitcoin – freedom from the grip of the institutional actors and regulators who control and direct global wealth towards their own needs.
However, there is a big disadvantage to this approach. The absence of a supervisory body means that there is no one to complain to when things go wrong. That means that there’s no-one to call to cancel a deal that looks suspicious. No insurance when money is stolen. No reset system for when a password or seed phrase is forgotten. And if money is sent to the wrong address by mistake, the only recourse is to rely on the magnanimity of the second party – if you even know who they are. And, as mentioned above, expensive mistakes happen a lot, made by individuals, start-ups and institutions alike.
According to Chainalysis, a blockchain analysis company, 20% of all bitcoins that exist today, representing around $120 billion as of the time of writing, have been lost. And according to Atlas VPN, hackers stole nearly $3.78 billion in digital assets over 122 attacks in 2020. No one will be able to use or trade these coins. Disappointing news for all those who could have been millionaires, and for the entire crypto market.
Not only this – these losses have an effect on prices. Most digital currency protocols have a coin limit set in advance, intended to create an artificial shortage and thus control inflation. Bitcoin, for example, has a limit of 21 million coins. But coin losses shrink the supply, increasing the value of the coins that remain. This in turn attracts more investors, taking even more coins out of circulation and further pushing the price of the coin.
So as important as anonymity is to the cryptocurrency market, it also holds it back from universal adoption. People are compelled to decide between anonymity and transparency – were there a solution, it could propel the popularity of decentralized currencies and strengthen the case against the traditional financial system.
One recent example highlighting both sides of this issue was the June 2021 resolution of the Colonial Pipeline attack.
In early June 2021, the US Department of Justice announced that it had managed to track down and return 63.7 bitcoins – around $2.3 million – from DarkSide hacker group. This organization was able to shut down Colonial Pipeline’s computer systems for days, but federal authorities were able to locate the ransom with the help of private market officials, who tracked the wallets used by the hackers. It is not clear how the authorities gained access to the wallets, possibly through hacking into computers.
While this is not the first time law enforcement has been able to recover such funds (the aforementioned wallet address once held no fewer than 29,656 bitcoins, and belonged to the person who operated Silk Road), it resonated more than most incidents as a result of the high ransom, the current popularity of the crypto market, and because the attack was on vital infrastructure and received widespread coverage.
Finding a solution
These issues have produced a strong dialectic between the ideologues and the pragmatic – between those who want to preserve the original idea of Satoshi Nakamoto and those who are willing to compromise so that the market will be more usable.
Solutions that don’t change the system include wallets with automatic backup, wallets that automatically send coins at a pre-set time, systems that warn users before they complete a coin transfer, services to engrave private keys on stainless steel, and even special hacking services that charge 20% of everything the hackers manage to recover.
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On the other hand, solutions emerge with an inherent contradiction to the spirit of Satoshi. Many platforms, especially those that operate in large volumes and are looking for their way into the mainstream, require their participants to present proof of identity. This allows them to who got what coins – which can be used to combat fraud and provide some kind of insurance.
It can be argued that, in some ways, cryptocurrency is more open that fiat. There are companies that specialize in monitoring the movement of coins through major nodes where they are often exchanged for other currencies. They know how to contact wallet manufacturers for information and contact these nodes to try to return the coins in criminal proceedings if necessary.
In the traditional financial system, on the other hand, every intersection through which money passes – whether it is a bank, a stock exchange or a company account – is hidden from view and a court order is required to disclose movements.
Conflict: with or against
The fact that Bitcoin movements can be tracked generates two opposing reactions. There are those that build obfuscating tools, such as ‘mixers’ where coins are put into shared repositories and mixed with other people’s coins. And others work to increase transparency, developing services to mark ‘kosher’ transactions so that anyone can see the history of marked coins.
The holy grail would be a way of undoing a bad transaction without compromising the integrity of the blockchain. For more information about Kirobo’s Undo Button, click here.