The popular adage “not your keys, not your bitcoins” reminds us of how ownership works in bitcoins, which is sometimes incomprehensible to the layman. Many people do not know that it is possible to sovereignly own bitcoins with the so-called private keys. This system allows the properties of the physical world to be reproduced in digital space, although there are still some differences between the two universes. Let’s see how it works and what it entails.
Private keys and digital signature
One of the two fundamental pillars of Bitcoin is the concept digital signature… This concept is a subset of asymmetric cryptography that allowsauthenticate the author of the post… This is not done to hide communication between two people, but to verify public messages signed by one person.
The principle is simple. First, the author of the post creates the so-called “private” key (choosing it at random) and gets one the so-called “public” key which he reveals to all other participants. It then signs the message with the private key and broadcasts the result to the network. Finally, the generated signature is verified by all parties with the public key and the author’s message. The private key is never revealed, which allows the operation to be repeated multiple times without leaking.
Bitcoin uses the same principle. In this case, the messages are deal and the authors of these messages are owners bitcoins.
When he wants to receive a payment, the user generates a private key, extracts a public key from it and creates from it address which represents (in general) its cryptographic fingerprint, obtained using a hash function. He then receives bitcoins at that address, either by receiving them from another user, or by mining (less commonly). After receiving the bitcoins, he can spend them by signing the transaction using the private key corresponding to his address. The peer-to-peer network then verifies that the transaction is valid, meaning the generated signature does indeed match the public key and the details of the transaction.
Algorithm used in Bitcoin: ECDSA : Elliptic Curve Digital Signature Algorithm… As the name suggests, it is based on an elliptic curve,
secp256k1which is used to obtain a public key from a private key and to sign a transaction using a private key. Another algorithm, the Schnorr algorithm, will be implemented in BTC in November next year, but this will not affect the overall operation of the device.
Thus, the role of the private key is central. This is why he must remain secret: it is he who gives access to the fund and to any person who knows that he can confiscate the bitcoins that he represents.
As already mentioned, a private key is computer information, that is, a number. More precisely, it is a very large number, from 1 to 2.256… If we choose this number at random, it is statistically impossible for anyone to stumble upon it: indeed, this interval is approximately 1.1579 × 10.77 possibilities, or an amount approaching the number of atoms in the universe. An example of a private key (written in hexadecimal):
it randomly generated, often thanks to pseudo-random algorithms to reproduce randomness as accurately as possible. Please note that this number is not chosen randomly, can weaken the security of the system. For example, a person who chooses the number 1 as a private key will never be able to use the corresponding address, since it is constantly monitored by specialized programs. Similarly, using wallets for the brain highly discouraged.
However, in most portfolios, this random generation is indirect. Private keys (and their corresponding addresses) are actually produced according to a standard method of obtaining information from one piece of information, which is usually of the form mnemonic phrase of 12 or 24 words. For example, the following sentence is perfectly true:
level bronze false scheme flip truly mutual point glad youth slab ordinary
In this case, it is the knowledge of this proposal (and the withdrawal path) that guarantees access to funds, and it is this that must be correctly generated randomly.
IN property it is the absolute control exercised by a person over one thing, with the exception of all other people. Thus, you can own a book, a car, or a piece of land. Often, ownership is exercised through ownership, which establishes de jure balance of power.
Forms of ownership basis of money : Indeed, an effective monetary system is impossible without real control over the units. The exchange of gold coins or banknotes with no intrinsic value requires the holder to have full control over them and can relinquish this control during the transaction.
However, today there is a tendency towards dematerialization, which in the banking system leads to a deterioration in the state of property. When paying by credit card or transfer, we only exchange claims provided by banks. In addition, we are subject to all forms of censorship (from not sending a transfer to freezing an account without notice) due to regulatory restrictions and banking arbitrariness.
Bitcoin allows you to regain full ownership of your money, even if that ownership is different from that held in relation to objects. Bitcoin ownership, as we have seen, is inseparable from exclusive knowledge of private keys and from protecting this knowledge, which entails many consequences.
Primarily, information is more valuable than ever… Knowledge has always had value because of the power that it brought (Scientia Potentia is), but with the advent of bitcoins and cryptocurrencies today, it provides direct access to wealth. If someone knows the private key corresponding to the address containing the bitcoins, they can spend those bitcoins at will.
This localization of value in knowledge of information allows very easy to transport bitcoins in one way or another, storing the private key in memory. For example, a person can cross a border with a piece of paper on which the information in question is located, or simply memorize it (for example, a 12-word sentence is easy to remember).
Conversely, it also does problematic fund security… Indeed, to retain ownership of your bitcoins, you must both preserve access to your private keys (to avoid data loss) and exclude other people (avoid data leaks). This creates a dilemma between protection against loss and protection against theft, which each person prefers as they see fit.
Finally, the ultimate implication is that multiple people can own the same bitcoin either implicitly, knowing the same private key, or explicitly through managing a shared account that requires a single signature. So bitcoin ownership is different from owning a gold coin in that we can have multiple bitcoin owners.
What are the risks?
Bitcoin ownership depends on access to private keys. However, this can be a problem for people who do not feel able to manage their private keys, whether in order to avoid the risk of loss and theft associated with this management, or to facilitate use. This prompts them to resort to trusted third partyby delegating control of their bitcoins to them, such as exchange platforms or lending platforms. They are then based on a promise from the custodian to return their bitcoins to them when they initiate a withdrawal.
However, the claim we have against a trusted third party is not the property of the bitcoins, as it is that third party that theoretically controls them. This is the meaning of the proverb “No keys, no bitcoins” (” not your keys, not your coins “) This is a reminder that a user who does not manage their private keys does not actually own the bitcoins that they think they have. Indeed, while property delegation has certain benefits, it also carries a certain amount of risk for those who do it.
The first risk is risk of loss trusted third party. This happened in July 2011 with the Polish exchange Bitomat, which lost the private keys associated with 17,000 BTC as a result of a technical incident. However, most platforms now use good backup methods and the risk is very low.
The second risk is risk of internal theft, the case when the platform administrator or employee “escapes with the cash register”, leaving the platform bankrupt due to lack of liquidity. Sometimes we talk about exit scam orway out of fraud… This risk was illustrated in July 2011 by the closure of the MyBitcoin service after the theft of 78,740 BTC by its anonymous founder Tom Williams. More recently, this danger has surfaced in the QuadrigaCX case, a platform accused of running the Ponzi scheme.
The third risk is piracy risk external participants. This risk arises from the exploitation of computer and / or human deficiencies in a platform operated by a trusted third party, resulting in the disappearance of your funds either in your individual account or as a result of bankruptcy. The most famous example of this type of incident is Mt. Gox, which underwent many hacks between 2011 and 2013, which resulted in the loss of 650,000 bitcoins and bankruptcy of the platform in 2014. If the danger of being hacked was pretty good in the early days of Bitcoin, it has now diminished thanks to the security measures and guarantees of the platform.
The fourth and final risk is risk of being stolen or closed by intimidationis usually carried out in the event of government intervention. In such a situation, an individual or organization threatens a trusted third party that transfers some or all of its users’ funds to them. It is in this category that the seizure of BTC-e by the US Secret Service in July 2017 is found.This risk is currently the highest of the four and should not be overlooked.
Bitcoin is a digital currency system that allows full ownership through a digital signature process. Thus, owning bitcoins differs from owning physical objects in that it is based on knowing one piece of information: the private key.
By keeping your funds on the exchange, you are missing out on what makes Bitcoin so interesting, hence the adage “not your keys, not your bitcoins.” In addition, you make it more vulnerable to social attacks by centralizing the economy by delegating to a third party.