Collaborative Custody: The Era of Multi-sig Security

written by @emylacapra

Collaborative custody is a Bitcoin security solution that, for some, may encapsulate two important features: self-custody over funds & a responsible 3rd party in case anything goes wrong.

It’s recently been reported that the number of wallets containing 0.1BTC or more has reached an all-time high of 3,054,282. Moreover, since Bitcoin is increasingly emerging as a store of value and a growing amount of retail and institutional investors are including the top cryptocurrency within their portfolios, concerns around the security of funds are also rising.

Especially in view of a possible upcoming new bull market, it’s paramount to know which options both regular and institutional investors have at their disposal to preserve capital against hacks, loss of private keys, and theft.

Custodians and exchanges have been popular targets of theft and fraud over the years. It’s been revealed that approximately $11B has been lost overall due to major hacks. While many exchanges have continued to improve upon security practices in regard to custody, the regulatory environment is still very much playing catch-up to this new paradigm in understanding what should be expected from these new financial entities. Therefore, leaving non-working capital entirely with custodians for extended periods of time can be a high-risk solution.

Self-custody solutions such as hardware wallets offer better security than exchanges because private keys stay under the control of the funds’ owner – meaning that the assets are no longer sitting in a honeypot with other user funds. However, they present their own challenges as they lack redundancy and produce a single point of failure that increases the risk of losing funds or having a wallet compromised.

There are plenty of other options available in the market; it all comes down to the level of technical skills possessed by the users. It’s true that being more technically aware might preserve your privacy and security better, but it’s not an essential prerequisite. Indeed, in the last couple of years, companies have worked hard to provide easy-to-use wallets and services to allow even newbies to secure their investments in a simple way. Multi-signature systems, for instance, split the responsibility for possession of bitcoin among multiple people or entities in different locations avoiding a single point of failure and, as a consequence, the relevant wallet is harder to compromise. They offer on-chain transparency, as all addresses and transactions are on-chain; and redundancy against loss because extra keys are provided as a backup so that if one key is lost, the backup keys can be used to recover funds.

With a semi-custodial multi-signature (collaborative custody) solution, keys can be spread across different devices, locations, entities, family members, or institutions. Typically, the service requires the funds’ owner to keep two private keys in their possession and the third to a semi-custodial service like Unchained Capital or Casa. By using collaborative custody, Bitcoin holders have the advantage of greater transparency and the security that a financial services provider can offer. Full self-sovereignty over funds can be a daunting prospect for newbies and non-techie users, therefore, resorting to a semi-custodial service might be the safer option to reduce the risk of loss from hacks, maintain transparency of assets, share control only when necessary, protect funds from exchange insolvency and reduce single point of failure risk.

Austin-based Unchained Capital has emerged as a trusted party for both retail and institutional investors by offering an easy-to-use service, assuring increased security while allowing the participant to preserve sovereignty. The service can be integrated into a hardware wallet, a Ledger, or a Trezor, and does not have to be technically challenging or expensive to be employed. Control over funds is always assured to the user but if one of the keys is lost, Unchained Capital can co-sign during the transaction process. With regards to privacy, as a financial institution, Unchained Capital requires KYC (Know Your Customer) and AML (Anti Money Laundering) compliance but doesn’t voluntarily reveal or monetize user data.

New York-based crypto custody startup Casa has released a new wallet for Bitcoin newbies and long-term hodlers. Designed by Bitcoin and privacy expert Jameson Lopp, Casa’s unique multi-location and multi-sig security model removes single points of failure and protects from theft, accidents, and disasters.

It provides two main types of service suitable for larger or smaller Bitcoin balances:

1. A high-security 3-of-5 multi-sig system best suited to protect large Bitcoin balances ($100K to $1M and up). The system is much more secure as it considerably raises the cost of a successful attack since the attacker must gain access to three private keys.
2. Casa 2-of-3 basic multi-sig system is designed for clients holding a smaller amount of bitcoin, typically between $1K and $100K. Two keys are necessary to execute a transaction and are distributed between one mobile phone, one hardware wallet and one emergency backup key kept by Casa.

Unlike Unchained Capital which is a financial institution, Casa is a custodial or semi-custodial storage service and is, therefore, not subject to KYC or AML requirements. They take the minimal private data necessary for shipping devices for example, but the information is removed from their database after the shipping is completed.

“Not your keys, not your money” soon becomes a mantra for newcomers too. While a few years ago the sentence was much more difficult to apply due to a lack of proper custody and security solutions, nowadays there is little excuse for risking the loss of capital.

While the market prepares for a potential new long-awaited bull run, hackers will become more aggressive. Learning about security precautions is a must to prevent loss for new coiners and long-standing hodlers alike.