The outcome of the Proof of Keys Celebration was a valuable lesson
Bitcoin Genesis Day 2018 — January 3rd — 10 years after the first Bitcoin was mined by Satoshi Nakamoto, saw the Proof of Keys event call for cryptocurrency holders to withdraw all Bitcoin from cryptocurrency exchanges.
The purpose of this was not only to test the solvency of exchanges, but also to teach the lesson of "not your keys, not your Bitcoin". In what was essentially an intentional bank run, called for by Trace Mayer, in what may have been the beginning of a long-standing tradition.
Bitcoin's fundamental point
Taking a step back, the whole idea of monetary sovereignty is one of the core concepts of Bitcoin. On October 31st, 2008, the Bitcoin white paper was released following the worst financial recession since the Great Depression. The timing of it all seemed impeccable — a Peer-to-Peer system of transferring digital money without relying on middlemen to control the network.
With blockchains powering Bitcoin transactions, users would control their own private keys and thereby be in full control of their Bitcoin. This was (and still is) in stark contrast to modern financial institutions, where fractional reserve lending allows a bank to essentially create money to provide loans, using customer deposits.
The point of the Proof of Keys event, as it has become known, is for cryptocurrency exchange users to withdraw their Bitcoin to a cold-storage unit. While this is a test to see if the exchanges are in fact solvent and can handle a large amount of Bitcoin withdrawals in timely fashion, it is also a lesson to users.
Users were urged to withdraw Bitcoin in the days leading up to January 3rd, as it was recommended to be "at the front of the line, rather than at the back of the line."
Tragedy of keys
There are many tragic stories of cryptocurrency enthusiasts losing their Bitcoin because they transferred to an incorrect address, a different blockchain or simply because they lost their private keys. One story that stands out is that of James Howells losing a hard drive with a Bitcoin wallet allegedly worth more than $60 million dollars. The fatal mistake was not having the private keys and seed phrase backed up.
Therefore, it was the intent of Proof of Keys to teach users the invaluable skill of being in control of their private keys. See, if your Bitcoin is stored on an exchange's custodial services, you are not truly in control of your Bitcoin.
However, in the days leading up to the event, several exchanges reported issues with withdrawals — though the outages were excused as order book issues and gateway upgrades. The biggest incident revolved around HitBTC freezing a user account ahead of a large withdrawal of funds. While the details are still unconfirmed whether these events are linked, questions arise when businesses are unable to execute on large withdrawals.
Lessons learned
As the first of its kind, this "intentional bank run" has not been seen to be fully impactful for measuring solvency — still, there are positive upsides to the story.
- Users are gradually becoming aware and versed in protecting private keys, which is definitely an important factor to consider in a space notorious for high technical learning curves.
- Exchanges have proven to be more or less capable of handling a high frequency of withdrawals, meaning that most players in the space are conducting business in transparent and compliant ways.
- The Proof of Keys event is likely to occur next year, or perhaps even sooner, on a larger scale in order to test the capabilities of the current crypto alternatives for banking and trading operations.
The Proof of Keys event is designed to remind the trading community that while decentralized exchanges are emerging, the majority of the volume still takes place on exchanges which have full control of the money traded. — Source: CCN.com
For any financial institution, the subject matter of solvency is of utmost importance. The emergence of Bitcoin was the result of a banking system that was opaque, greedy and obviously ill equipped to handle public distrust, despite being a cornerstone of the global economy.
Hopefully, the boundaries are continued to be tested in terms of public trust in financial institutions, and the faith in innovative technologic systems can continue to flourish. We'll see on January 3rd next year if exchanges live up to their promise, or if by that time, the public has learned to keep their keys safe.
Article by Carl Jenster
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of ARYZE.
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