Bitcoin Security

Securing bitcoin is challenging because bitcoin is not an abstract reference to value, like a balance in a bank account. Bitcoin is very much like digital cash or gold. You’ve probably heard the expression, “Possession is nine-tenths of the law”.

Well, in bitcoin, possession is ten-tenths of the law. Possession of the keys to unlock the bitcoin is equivalent to possession of cash or a chunk of precious metal.

You can lose it, misplace it, have it stolen, or accidentally give the wrong amount to someone. In every one of these cases, users have no recourse, just as if they dropped cash on a public sidewalk.

Security principles

The core principle in bitcoin is decentralization and it has important implications for security. A centralized model, such as a traditional bank or payment network, depends on access control and vetting to keep bad actors out of the system.

By comparison, a decentralized system like bitcoin pushes the responsibility and control to the users. Because security of the network is based on Proof-of-Work, not access control, the network can be open and no encryption is required for bitcoin traffic. On a traditional payment network, such as a credit card system, the payment is open-ended because it contains the user’s private identifier (the credit card number).

After the initial charge, anyone with access to the identifier can “pull” funds and charge the owner again and again. Thus, the payment network has to be secured end-to-end with encryption and must ensure that no eavesdroppers or intermediaries can compromise the payment traffic, in transit or when it is stored (at rest).

If a bad actor gains access to the system, he can compromise current transactions and payment tokens that can be used to create new transactions. Worse, when customer data is compromised, the customers are exposed to identity theft and must take action to prevent fraudulent use of the compromised accounts.

Bitcoin is dramatically different. A bitcoin transaction authorizes only a specific value to a specific recipient and cannot be forged or modified. It does not reveal any private information, such as the identities of the parties, and cannot be used to authorize additional payments.

Therefore, a bitcoin payment network does not need to be encrypted or protected from eavesdropping. In fact, you can broadcast bitcoin trans‐ actions over an open public channel, such as unsecured WiFi or Bluetooth, with no loss of security.

Developing Bitcoin Systems securely

The most important principle for bitcoin developers is decentralization. Most developers will be familiar with centralized security models and might be tempted to apply these models to their bitcoin applications, with disastrous results.

Bitcoin’s security relies on decentralized control over keys and on independent transaction validation by miners. If you want to leverage bitcoin’s security, you need to ensure that you remain within the bitcoin security model.

In simple terms: don’t take control of keys away from users and don’t take transactions off the blockchain. For example, many early bitcoin exchanges concentrated all user funds in a single “hot” wallet with keys stored on a single server. Such a design removes control from users and centralizes control over keys in a single system. Many such systems have been hacked, with disastrous consequences for their customers.

Another common mistake is to take transactions “off blockchain” in a misguided effort to reduce transaction fees or accelerate transaction processing. An “off block‐ chain” system will record transactions on an internal, centralized ledger and only occasionally synchronize them to the bitcoin blockchain. This practice, again, substitutes decentralized bitcoin security with a proprietary and centralized approach. When transactions are off blockchain, improperly secured centralized ledgers can be falsified, diverting funds and depleting reserves, unnoticed.

The root of trust

Traditional security architecture is based upon a concept called the root of trust, which is a trusted core used as the foundation for the security of the overall system or application.

Security architecture is developed around the root of trust as a series of concentric circles, like layers in an onion, extending trust outward from the center. Each layer builds upon the more-trusted inner layer using access controls, digital signatures, encryption, and other security primitives. As software systems become more complex, they are more likely to contain bugs, which make them vulnerable to security compromise. As a result, the more complex a software system becomes, the harder it is to secure.

The root of trust concept ensures that most of the trust is placed within the least complex part of the system, and therefore least vulnerable, parts of the system, while more complex software is layered around it. This security architecture is repeated at different scales, first establishing a root of trust within the hard‐ ware of a single system, then extending that root of trust through the operating system to higher-level system services, and finally across many servers layered in concentric circles of diminishing trust.

Bitcoin security architecture is different. In bitcoin, the consensus system creates a trusted public ledger that is completely decentralized. A correctly validated block‐ chain uses the genesis block as the root of trust, building a chain of trust up to the current block. Bitcoin systems can and should use the blockchain as their root of trust.

When designing a complex bitcoin application that consists of services on many different systems, you should carefully examine the security architecture in order to ascertain where trust is being placed. Ultimately, the only thing that should be explicitly trusted is a fully validated blockchain. If your application explicitly or implicitly vests trust in anything but the blockchain, that should be a source of concern because it introduces vulnerability.

A good method to evaluate the security architecture of your application is to consider each individual component and evaluate a hypothetical scenario where that component is completely compromised and under the control of a malicious actor. Take each component of your application, in turn, and assess the impacts on the overall security if that component is compromised.

If your application is no longer secure when components are compromised, that shows you have misplaced trust in those components. A bitcoin application without vulnerabilities should be vulnerable only to a compromise of the bitcoin consensus mechanism, meaning that its root of trust is based on the strongest part of the bitcoin security architecture.

Physical Bitcoin Storage

Because most users are far more comfortable with physical security than information security, a very effective method for protecting bitcoin is to convert them into physical form.

Bitcoin keys are nothing more than long numbers. This means that they can be stored in a physical form, such as printed on paper or etched on a metal coin. Securing the keys then becomes as simple as physically securing the printed copy of the bitcoin keys.

A set of bitcoin keys that is printed on paper is called a “paper wallet”, and there are many free tools that can be used to create them. I personally keep the vast majority of my bitcoin (99% or more) stored on paper wallets, encrypted with BIP-38, with multiple copies locked in safes.

Keeping bitcoin offline is called cold storage and it is one of the most effective security techniques. A cold storage system is one where the keys are generated on an offline system (one never connected to the internet) and stored offline either on paper or on digital media, such as a USB memory stick.

Hardware Wallets

In the long term, bitcoin security increasingly will take the form of hardware tamperproof wallets. Unlike a smartphone or desktop computer, a bitcoin hardware wallet has just one purpose: to hold bitcoin securely.

Without general-purpose software to compromise and with limited interfaces, hardware wallets can deliver an almost foolproof level of security to nonexpert users. I expect to see hardware wallets become the predominant method of bitcoin storage.

For an example of such a hardware wallet, see the Trezor or Ledger.

Diversifying risk

Would you carry your entire net worth in cash in your wallet? Most people would consider that reckless, yet bitcoin users often keep all their bitcoin in a single wallet. Instead, users should spread the risk among multiple and diverse bitcoin wallets.

Prudent users will keep only a small fraction, perhaps less than 5%, of their bitcoin in an online or mobile wallet as “pocket change.” The rest should be split between a few different storage mechanisms, such as a desktop wallet and offline (cold storage).

Conclusion

Bitcoin is a completely new, unprecedented, and complex technology. Over time we will develop better security tools and practices that are easier to use by nonexperts. For now, bitcoin users can use many of the tips discussed here to enjoy a secure and trouble-free bitcoin experience.