Proof of Keys

Samantha Standish
Dec 22, 2018 · 6 min read

“There’s no time like now to learn the importance of private keys.”

Photo by rawpixel on Unsplash

You don’t have to own cryptocurrency to participate with the annual January 3rd Proof of Keys event because it’s an educational event. It’s meant to teach people the meaning behind cryptocurrency.

Cryptocurrency isn’t digital money. The world already has digital money. Digital money is a ledger of transactions stored on a digital database. Cryptocurrency is a ledger of transactions stored on a distributed digital database that allows you and only you to access your address. No one else in the universe has access to that address but you. This is what makes it cryptocurrency.

To access your address, you have to have your private key. Remember, the wallet software that lets you interact with a particular blockchain generates private keys for a public address on the blockchain. The January 3rd Proof of Keys event is to help people understand that if you don’t have your private keys, you don’t have cryptocurrency.

“But I just bought a bunch of Bitcoin on an exchange. I definitely own cryptocurrency,” you say.

No, you don’t. You don’t have the private key. There’s something between you and access to the address on the Bitcoin blockchain.

Say you have Cash App on your phone, and you used to it buy some Bitcoin. You don’t actually own any Bitcoin cryptocurrency.

“But I do,” you reply showing me the amount on your phone. “It says that I have Bitcoin right here.”

That’s just a screen. Your screen isn’t the Bitcoin blockchain. For you to have Bitcoin, you have to have an amount shown under an address on the Bitcoin ledger that you can access with your private key. You don’t have that with your Cash App until such time as you withdraw the “Bitcoin” into a wallet that generates an actual notation on the Bitcoin blockchain that you can verify on the ledger itself. Using your Cash App, what you have is an agreement with Cash App to acquire Bitcoin.

“But I can send Bitcoin to my buddy,” you counter. “It’s real Bitcoin because I can trade it.”

No, you can send the agreement to acquire Bitcoin to your buddy through your app, and your buddy can then complete that agreement by initiating a transaction to move that Bitcoin into his private wallet. When the Bitcoin is actually in his wallet and verified on the Bitcoin blockchain, the transaction is complete, and he has Bitcoin cryptocurrency. At that point, he can access that address without permission from anyone because he has the private key. That’s cryptocurrency.

“To have cryptocurrency, you have to have a public address on the blockchain and a private key that lets you access that address.”

Until such time as it’s on the Bitcoin blockchain and you have the private key that lets you access that Bitcoin address, it’s not Bitcoin cryptocurrency. It’s Bitcoin digital money. What’s the difference? Digital money is controlled by third parties. Let me say that in bigger print:

“Digital money is controlled by third parties.”

I can create a digital ledger on an Excel spreadsheet and call it SAM cryptocurrency and create an infrastructure the requires you to pay money to convert to SAM. What’s more, I can deny you access to SAM because it’s digital money, not cryptocurrency. This is true even if I label and advertise it as a cryptocurrency. This is true even if I create my own blockchain and wallet software. Putting something on a blockchain and creating software to access the blockchain system doesn’t make it cryptocurrency. SAM is just digital money because it’s not a distributed ledger, and I control access to it.

I can claim that you can convert SAM into Bitcoin. That makes it cryptocurrency, right? Nope. My app can have screens that tell you that I’ve converted SAM to Bitcoin, but it’s still fake Bitcoin. We’re just playing around with digital money here. None of it is cryptocurrency until I transfer Bitcoin on the Bitcoin ledger to you, and you have an address on the Bitcoin blockchain under the control of your private key.

“Cryptocurrency is about who can access and move the money.”

Individuals don’t have control over digital money. Your bank can deny you access to your funds at any time for any reason. Cash App deals with digital money until you withdraw or send that Bitcoin into a private wallet. They could go out of business, and you’d lose the money you paid to buy Bitcoin because you don’t have the actual Bitcoin cryptocurrency. This could happen at all of the cryptocurrency exchanges.

When you work with a bank or an exchange or a money app, you’re entering into a trust agreement with them, and they can betray that trust willfully or through incompetence or through an event that’s out of their control. Cryptocurrency was designed to avoid this.

If you have “cryptocurrency” on an exchange like Coinbase or Binance, you don’t have cryptocurrency on Coinbase or Binance. You have an agreement to receive cryptocurrency with these institutions.

“But I have an address for the cryptocurrency, and I can verify it on the blockchain,” you counter.

That’s like saying that you own the cryptocurrency of any address that you see on the blockchain. I can give you an address on the blockchain, and I can tell you that it’s yours, and you can look it up, but it’s not really yours because you don’t have the private key to that address.

The same goes for the currency that’s “yours” that an exchange is holding for you. You can’t access that currency directly, so it’s not yours. You have an agreement with the exchange to acquire that cryptocurrency. If they’re holding an address for that purchase, then you have an agreement with them for them to access that private key when you give them instructions. However, they have the power to fail to perform, and there’s nothing you can do about it.

Now, there isn’t anything wrong with forming these types of agreements with third parties. Most people are used to dealing with a bank. So, they’re familiar with third-party arrangements. There’s a certain kind of comfort involved because they have practice using third parties to conduct financial transactions.

However, an agreement with an exchange or a bank is an agreement based on trust. You can’t force an institution to perform. You can only try to force them to perform. Despite this, sometimes people need these types of trust agreements because it lowers their risk. Everything is relative to the individual, you see.

Because of the nature of cryptocurrency, everything is about risk assessment. Risk assessment is personal. For example, you could blindly pull all of your cryptocurrency off Coinbase to participate with the January 3rd Proof of Keys event, go out to dinner, come home, and your house burned down and with it the wallet on your computer that holds all of your cryptocurrency, and you have no way to rebuild the wallet because you didn’t back up your seed phrases (the emergency measure that allows you to rebuild your wallet) in another location. So, now you can’t access the cryptocurrency address because you don’t have your public address and private key.

Not having your cryptocurrency on an exchange doesn’t mean it’s safe. Having your cryptocurrency in a private wallet doesn’t mean it’s safe. Having your private keys doesn’t mean your cryptocurrency is safe.

You could put your private keys in a document that you have on cloud storage and someone hacks the account, finds the document, and moves all of your cryptocurrency to their addresses thereby losing your cryptocurrency forever.

Or you could have greedy relatives or roommates that steal your private keys off the list that you keep under your bed. In other words, for you, the risk that Coinbase will go under or fail to honor its contract with you might be less than if you’re left to your own devices. Custodial services aren’t necessarily a bad risk. Everything’s a risk in this arena. And in life.

The point of the January 3rd Proof of Keys event is to inform people about the nature of cryptocurrency. It’s for people to understand how cryptocurrency differs from digital money. It’s to help people be clear about what’s going on when they buy “cryptocurrency” on an exchange. They’re not actually buying cryptocurrency. They’re making an agreement to acquire cryptocurrency which may or may not be fulfilled. They don’t actually own the cryptocurrency until they have an address on the blockchain that they can access with their private key.

If you have to ask someone for permission to access your “cryptocurrency,” you don’t have cryptocurrency. It’s that simple. The January 3rd Proof of Keys event is meant to remind people of that fact. It’s to help them to know the difference so that they can make informed decisions.

Samantha Standish

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I’m a writer. I focus on the why behind the what.

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