Proof of Keys – Why It’s Important
| KEY TAKEAWAYS: |
| — Most Public WiFi networks are not encrypted therefore they are easy targets for remote access by a potential attacker. — Hackers set up their own malicious WiFi routers in a public venue (e.g., a hotel) with the goal of snooping web traffic using a dubious access point. — If users log into unsecured accounts like bank gateways or online crypto wallets, attackers can intercept that data. — Hardware wallets also provide excellent defenses against public WiFi intrusions. |
Proof-of-keys is the foundational concept of cryptocurrency – here we explain what it means.
Proof of keys (PoK) is an extension of the “Don’t trust, verify” motto that has captured the ethos of Bitcoin hodler circles. The concept quickly snowballed into an annual event on January 3rd, where Bitcoin community members deliberately withdraw their assets from all exchanges and custodial third parties on the same day. This date was specifically chosen as it falls on the same day that the Bitcoin Genesis Block was mined 11 years ago.
The move represents the users’ sovereignty over funds and also doubles as a high-profile mechanism for verifying that custodial (e.g., exchange) reserves are sufficient to cover customer deposits. The event is analogous to a bank run, where customers extract cash from a bank en masse, typically during times of economic turmoil.
What does this prove?
Due to fractional reserve banking requirements, banks that do not have sufficient assets to cover the mass withdrawal of customer deposits become insolvent. The most prominent example of a bank run in recent memory was the collapse of Washington Mutual during the 2008 Financial Crisis.
Similarly, the problem of reserves of custodial exchanges is endemic in the crypto market, with egregious examples like the QuadrigaCX debacle all too common. As is continually expounded in crypto circles, trusted third parties can be security holes.
If a custodial third party (e.g., an exchange) holds your assets, they handle your private keys. And just like the fine print in a banking deposit contract, the funds are technically not yours. PoK was designed to demonstrate the resolve of crypto asset holders in upholding a primary tenet of the cryptocurrency movement, authentication.
Initially launched last year by Trace Mayer, the proposal for an annual PoK event quickly gained traction on social media forums like Twitter and Reddit. The official website even enumerates steps for users to safely withdraw and store their bitcoins offline, as well as verify transactions on the network by running a full node.
Hardware wallets like Ledger play a critical role in the PoK event.
Bitcoin’s promise of independent property rights reverts financial sovereignty into the user’s hand, not a third-party custodian. By affording users complete control over their funds in offline hardware wallets, users do not have to fear instances of exchange insolvency or regulatory-induced pressure on third parties to surrender user funds.
Hardware wallets protect your private keys by randomly generating them during the initiation of your wallet locally on the hardware device. Ledger devices set themselves apart by not only having a leading entropy in random number generation but also for being the only hardware wallet that’s certified for its security by a third party.
As Ledger hardware wallet devices store your private keys securely within its hardware, you own your own keys – thus your own crypto. Our users can rest easy, knowing that their cryptocurrencies are in their possession and out of reach for online hacks. Indeed, hardware wallets are often considered the optimal way to own your private keys, leading to them being highly popular for the PoK event.
PoK serves a more considerable purpose than just a show of sovereignty that bolsters Bitcoin’s network decentralization too. It is a moment of camaraderie among the broader crypto community, and in adverse cases, illustrates specific custodians or exchanges that may not be as solvent as they purport to be.
More than anything, the Proof-of-Keys event provides a valuable lesson to newcomers to the cryptosphere: not your keys, not your coins. It’s helped many users to understand what it means to entrust your cryptocurrencies to third parties, meaning they are in control of your digital assets.
Hardware wallets will play a critical role in the next PoK event, and Ledger is proud to serve users the sovereignty that they seek.
Knowledge is power.
Keep learning! If you enjoy getting to grips with crypto and blockchain, check out our School of Block video about blockchain use cases.