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By: Jesse AbramowitzBlockchain Developer
In what seems stranger than fiction, earlier this week, Quadriga, admitted that they are unable to recover access to $145 million of BTC and other digital assets. This was announced after 30 year old founder Gerald Cotten was reported dead following complications arising from Crohn’s Disease.
As it turns out, Cotten was the only one with access to Quadriga’s funds in cold storage and the password was lost along with his life.
It is a a very sad end to the story, both for the friends and family of Cotton, but also users of Quadriga.
In the wake of this story, it seems crazy for anyone to keep a significant amount of funds on exchanges, yet this isn’t the first time and this won’t be the last time. For example, Mount Gox. At the very least hopefully, I can make a strong argument in the meantime and maybe change some minds.
Let’s start at the beginning.
What does owning a Bitcoin mean?
The Bitcoin (I mean most cryptocurrencies for the purposes of this article, we’ll use Bitcoin for default) network acts as one giant distributed ledger. It lives on multiple computers, and you can read or update the blockchain on anyone of them. In this trusted environment, how do we guarantee identity? More specifically, how do you know what belongs to whom?
This is accomplished through cryptography. As a user, you generate a private key, from this number, some mathematical magic occurs and voila! you get a public key. From the public key, you hash it and get an address. On the blockchain your funds belong to this address.
The only way to access them is by telling the blockchain what you want to do and signing that message with your private key. Through mathematics, your private key can stay secret but there is proof that the owner of that key generated the message.
Thus the owner of any bitcoin is the person who holds the private key.
In these situations, let’s take look at where your private key usually lies and analyze the possible vectors of attack.
Centralized Exchanges
This one is the big troublemaker in the industry. The owner of your private keys is not you. It is the exchange. Your ownership extends to a number on a piece of paper.
Think about it like this: when you go to a bank and give them your money, you no longer own that money, you are just a number on a paper. Now, if we completely ignore the argument of runs on a bank, and we look at North America, for the most part your funds will be safe. Also, the Government (of Canada) does insure our funds up to $100 000.
Exchanges do not have those same protections.
Now, for the most part the people running exchanges do not want to take your funds. This is because that would be illegal and altough they do make money off of you, it makes more sense to provide an exemplary service.
However, as we can see negligence and unfortunate events can sink some of the biggest exchanges.
Negligence and human error is but one vector of attack.
What about something more malicious?
There is a quote I like from an unknown
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.