When we transition to digital currencies and blockchain applications, we will need to learn to take individual responsibility for the safety of our assets or we will pay an expensive price.
For hundreds of years, we have put our trust in banks and institutions to keep our money and sensitive information safe. When a problem arises within these systems, we have depended on governments to resolve the situations through regulation. For example, in the 1920’s during the U.S. Depression, many banks went out of business after a series of bank runs. Because of this, millions of people lost their money and were hesitant to entrust their money again. In 1933, the government came to the people’s aid and created the Federal Deposit Insurance Corporation (FDIC). When a bank is FDIC insured, every depositor is guaranteed to be covered up to $250,000. The government passed this regulation to re-instill trust in the banking system.
A SHIFT OF TRUST
With the transition to blockchain, we will need to shift our trust from the banking system and government organizations to trusting the blockchain protocol. Blockchain is a unique technology because it’s able to hold records of people’s assets in a decentralized framework. Blockchain is often referred to as a trustless system which means, with blockchain, we don’t need to trust people or institutions. The trust resides in the technology itself.
For some, trusting blockchain protocols may be difficult at first. This is often due to their misunderstanding of where to appropriately place their trust. The trustless aspect of blockchain comes into play when the technology is used as it was intended…as a decentralized consensus platform. The operative word here is “decentralized.” There are a lot of blockchains coming out but many of them are centralized. The only truly decentralized blockchains to date are Bitcoin and Ethereum. (others claim to be decentralized but the nodes involved are often very few and/or are contained in a relatively close geographical area thereby making it more or less centralized).
Some people mistakenly believe that every cryptocurrency uses an open decentralized blockchain and that all blockchains are the same. I was speaking at a conference recently and during the Q&A period, one of the audience members said there is no way he can trust in Bitcoin because it’s so unsafe. He cited the recent hack in Japan-based Coincheck where $530M worth of cryptocurrency was stolen. There were several inaccuracies in his assumption however: 1) The hack involved the Nem cryptocurrency not Bitcoin 2) The hack happened at the exchange level not on Nem’s protocol 3) contrary to his statement, Bitcoin is one of the safest cryptocurrencies on the market.
In the nine years that Bitcoin has been around, there has not been a successful theft from the protocol yet. This does not mean that people don’t try. Hackers are constantly trying to hack into Bitcoin. The reason they’re unsuccessful is because of the decentralized nature of the protocol. To successfully compromise the system, a hacker would need to gain consensus from the community to implement their changes but hackers are never able to gain that consensus. This is why a decentralized blockchain is safer than a centralized database or enforcement agency. Regulations and laws do not prevent hackers from hacking into Bitcoin, the decentralized community does.
For proof of the safety of decentralized frameworks compared to centralized databases, all you have to do is look at the evidence.
Amount of Bitcoin stolen from:
- The Bitcoin Protocol — $0
- Centralized Exchanges — $15 Billion
When data is kept in a centralized exchange, it’s more susceptible to theft and corruption. This is why it’s important to 1) know the difference between a centralized blockchain and a decentralized blockchain and 2) put our trust in the decentralized blockchains. When there is a shift in trust, we will simultaneously see a shift in responsibility for the safety of our assets.
A SHIFT OF RESPONSIBILITY
With the move to digital currencies and blockchain applications, the safety of our assets and our sensitive information will become our individual responsibility. Currently, if we lose a valuable document, we generally have ways of getting a copy from an established organization like a government agency. Or if we lose money due to fraudulent behavior, we can get a refund from the credit card company or the service provider. There is often a record of what we owned somewhere in the bureaucratic universe.
Because of this backup system, our minds are set to think of digital assets as copies of something that exists in the cloud somewhere. With decentralized blockchains, however, the original data exists on individual nodes only. In other words, the original data will often exist only in our phones. That’s what makes blockchain so different from other technologies. It allows for the digital asset to be the “original,” much like cash. But also like cash, if you lose it, you lose it.
This may be a difficult transition for some. We all have that friend who seems to misplace their keys every other week or the family member who can’t find their eyeglasses even when the glasses are sitting on top of their head. These are the individuals who may have the hardest time with this new responsibility.
A number of people have lost millions of dollars worth of Bitcoin from being careless with their personal passwords to their Bitcoin accounts. Since the password doesn’t exist on a central database, if the person loses their password, there’s no way to recover it and the Bitcoin sits on the blockchain with no way to access it. As of July, 2018, a total of $44 billion worth of Bitcoin (6M Bitcoin) are left inaccessible and permanently lost on the Bitcoin blockchain. If you don’t want to lose access to your cryptocurrency, do whatever you can to keep your passwords safe.
Andreas Antonopoulos, one of the foremost blockchain experts, prints out his passwords and key phrases and puts the paper copies in bank safety deposit boxes. This is ironic given that Antonopoulos thinks banks will go by the wayside when cryptocurrency enters mainstream. I have always said that banks should consider transitioning from monetary banks to information banks. Then they can be sure to continue remaining relevant.
Whatever we do, whether we use safe deposit boxes or keep our passwords under our mattresses, we will need to be more mindful of keeping our digital money and data safe because that responsibility will now be up to us.
— Danette Wallace
Danette Wallace is Blockpass Business Development Consultant for South East Asia. To get in touch with Danette, email email@example.com