In a previous post, we evaluated the differences between crypto solutions for institutions looking to custody their digital assets. While there are some trade-offs between self-custody and third-party custody solutions, a third-party, qualified digital asset custodian is often a necessity for institutions.
Institutional-grade custody for cryptocurrency demands a higher level of security than is traditionally offered by third-party custodians like crypto exchanges. To satisfy these requirements, additional measures of security, like Multi Party Computation (MPC), are implemented to safeguard institutional wallets.
While Hardware Security Modules (HSMs) are more common in traditional finance, MPC technology is currently one of the fastest-growing solutions for digital asset security. Protego Trust implements the HA fast-MPC solution for our digital asset custody, along with secure hardware isolation.
The primary difference between MPC and other digital asset security solutions is that MPC does not store a wallet’s private keys in any single location. Instead, MPC divides wallet keys into small pieces (“shards”) and distributes them across several different locations.
The use and application of MPC technology started long before its emerging use case for crypto wallets. MPC started as a theoretical concept of cryptography in the late 1970s by an IBM formed ‘crypto group’. Cryptography existed long before computers, but its application remains the same today. In short, cryptography provides a way to send and receive information with two key benefits:
- Privacy: It ensures only the intended party can understand the information.
- Authenticity: It ensures the sender and recipient are who they claim to be.
As an example, imagine you are passing a note to a friend, but want to make sure no one else can read it. You can write the note in a private, shared language only you and your friend can understand. If they share the same “key” to translate the message, the note remains private and authenticated only to you two.
In a sense, this is how modern cryptography works for protecting digital assets. When you send an encrypted message digitally, you are employing complex, math-powered algorithms to encode the message in a unique language that only the recipient’s computer can decode. This applies to all transactions related to buying, trading and storing cryptocurrency and other digital assets. For each transaction, the sender provides an encoded message that can only be translated by the recipient. In successfully translating the transaction, the recipient can verify the identity of the sender and the sender can ensure that the correct recipient received the transaction. All of this is done in a way that provides assurance that no other intermediary could interfere with the transaction process.
MPC technology builds on this idea by further protecting and encoding the key and increasing the privacy of the transaction. Through MPC, we can validate the parties making transactions and translate the encrypted information without sharing the actual key information.
The application of MPC was first implemented by Andrew Yao in the mid 1980s through what is known as the Millionaries’s Problem. In this theoretical problem, there are three millionaires who want to find out who has the most money, without revealing their individual net worth. This problem can be solved by using a trusted third party that knows the net worth of each millionaire. That’s essentially the goal of MPC.
MPC builds on cryptography to allow the verification of private key information, without ever revealing that private key. With MPC, private keys are divided among multiple parties, who can only verify their piece of the key. This process, known as sharding, allows for the storage of private key information without a single point of failure.
MPC significantly increases the security of private keys because potential hackers would need to hack each client holding a key piece, without knowing where the keys are being held and then translate them, in order. Further, these clients do not communicate with each other, further increasing the complexity of the security.
Combined with other forms of security, like HSMs, MPC has proven to be an incredibly powerful solution for digital asset custody. As the subsector of cryptography continues to be developed, MPC technology will continue to evolve and provide a safer, more secure standard for the future of finance.
Protego Trust Bank N.A (in formation) is a purpose-built, conditionally federally chartered trust bank, exclusively serving the needs of institutional clients. With a firm belief that the future of all assets is digital, Protego Trust is defining the next generation of financial services by providing regulated infrastructure, advanced technology and safeguards that allow institutional clients to securely participate in cryptocurrencies and digital assets. In 2021, Protego Trust received a conditional federal charter from the U.S. Office of the Comptroller of the Currency, in addition to its Washington state charter. It plans to launch in 2022. Learn more about our institutional custody solutions today.