The greatest fear of cryptocurrency users is theft and hacking of their cryptocurrency wallets. More than 50% of respondents gave that answer, according to a study conducted by bitcoin.com.au. Let's find out how to keep bitcoins in safe.
What is the safest way to store bitcoins
It is important to define the difference between "Bitcoin-wallet" and "Bitcoin-address". A bitcoin wallet is a special software used to store and track the total balance of bitcoins from all bitcoin-addresses belonging to a user. From the technical point of view, the wallets actually don’t store bitcoins, but collect a specific user’s bitcoin-addresses.
A bitcoin-address is a unique identifier, which consists of 27-34 symbols of the Latin alphabet and numbers. Therefore, sending someone bitcoins means that you transfer them from your bitcoin-address to another recipient’s address.
Common bitcoin wallets used by almost 90% of all bitcoin users, support the bitcoin-addresses that require only one digital signature for the transaction confirmation. The signature verifies the Private key corresponds to the Public key, and details the amount of bitcoins to be transferred to the recipient's address. But if the user loses or forgets their Private key, they will lose access to the bitcoin-address.
A digital signature is a large number of figures calculated from a user's private key with the help of mathematical function. It is created during the processing of the transaction and confirms that the private key corresponds to the public key. The signature permits the transfer of bitcoins to another address.
The Bitcoin Network provides wallets that support multisig-addresses (abbreviated from multisignature, which means "multiple signature"). This type of wallet requires several digital signatures in order to get permission to transfer bitcoins to another address. In other words, Multisig-address provides the ability to manage one bitcoin address with the participation of two or more independent parties, with each of them possessing their own Private Key. The number of independent parties which are available to manage one Multisig-address is established when the address is created.
The existing ways how to use multisig-addresses
In general, the possibility to access the Multisig-address is described by a mathematical scheme N of M, where:
- M is the total number of parties, each of them owns the key;
- N is the minimum required number of mandatory keys for transaction confirmation.
Depending on the combination of N and M, there exist the following forms:
- A multisig-address requires 1 of M keys Using this address, you can use any of the M keys to gain access to your bitcoins. This address does not differ from the usual Bitcoin-address, therefore it will not guarantee you 100% security
A multisig-address requires the M number of M keys This is the least flexible option: to confirm the transaction you need all created M keys. If you create 5 keys, you will have to enter all 5 to confirm the transaction. And if you lose just 1 of that keys, you will no longer be able to access your Bitcoins. They will forever remain untouched in this wallet.
Multisig-address requires the N number of M keys The most convenient, flexible and practical option, which guarantees a high level of security. This address allows to divide a responsibility of bitcoin ownership between several parties, and also increases the security of cryptocurrency storage. For example, one key is stored on the hard drive, the second key is printed and stored in a safe place, and the third is stored on a hard disk in a bank cell.
How Biterest safely regulates escrow-deals with collaterals stored on multisig-addresses
Moreover, thanks to the last scheme, a situation where two parties of a transaction may remain unknown has become possible, and a third party will act as guarantor of fulfilling the obligations between two parties. No party of the deal who owns only the one key is able to access bitcoins, because without obtaining at least two keys it is not possible to access the Multisig-address.
Therefore, to guarantee the protection of both users, Biterest only stores bitcoin collateral on multisig-addresses which require 2 of 3 keys to access. The sequence of actions for creating these Multisig keys follows next steps:
- The borrower creates a new Bitcoin-address. The public key is uploaded in Biterest. The private key is securely stored by the borrower.
- The lender also creates a new Bitcoin-address and uploads only the public key in Biterest. The private key is also securely stored by the lender.
- Biterest creates a Multisig-address with the required number of keys, using the own Public key, the borrower's public key and the lender’s public key. The Multisig-address number consists of all 3 public keys and begins with figure 3 (a common public key begins with 1).
Using this type of multisig-address, neither the lender, borrower or Biterest is able to access the collateral without the consent of the another party. To complete any transaction, you always need Private keys of two independent users, for example:
- The lender and the borrower
- The borrower and Вiterest
- The lender and Вiterest
How to access the collateral using an Electrum wallet after the end of the loan period is described in detail at https://biterest.com/support/1/2Tweet