Bitcoin vaults: A promising new method to store your bitcoins

17. April 2020

If your bank account was compromised during a hacker attack, your bank can “easily” refund the money you have lost. However, if your crypto wallet has been hacked and your bitcoins have been sent to the wrong address, your bitcoins are permanently lost. The reason for this is that most cryptocurrencies are not controlled by a central authority. Hence, there is a great need for secure custody solutions for bitcoins and other cryptocurrencies.

One of the most common ways to protect your bitcoins from attackers is to sign transactions using hardware wallets, where the signing process takes place in an offline environment. Since the private key of hardware wallets does not come into contact with an online server during the signing process, hackers cannot access the private key. However, the process of transfer to and from an offline wallet (cold wallet) is more complex than the process with a conventional online wallet (hot wallet).

In order to ensure a simpler yet safe storage method, the idea of a “bitcoin vault” was proposed in 2016. The basic idea is that bitcoins are stored with a code that ensures that bitcoins are issued in a limited time frame. The owner can pre-define a time delay for each attempt of transferring bitcoins. This built-in delay allows the actual owner of the bitcoins to have enough time to undo a transaction in case of an attack.

With the recently launched prototype by Bitcoin developer Bryan Bishop, users of bitcoin vaults can also divide their bitcoins into sections. This ensures that a limited number of bitcoins can be sent to specific addresses at a given interval. Moreover, the prototype is introducing the concept of so-called “watchtowers” that monitor the bitcoin vaults. Each time bitcoins are to be transferred, the watchtower will send a message to the owner. If the transfer is not authorized by the owner, the bitcoin vault user can activate a pre-signed transaction that would transfer the bitcoins to a secure cold wallet. This can prevent the bitcoins from being stolen during a hacking attempt.

The big advantage of this idea is that the technology can be used free of charge by professional custody providers. As with all open source projects in this area, the entire industry ultimately benefits from such solutions. Bryan Bishop’s ultimate goal is therefore to make bitcoin vaults the standard for all cryptocurrencies. As mentioned earlier, Bishop’s open source project is a prototype. How exactly e.g. watchtowers will be implemented has not yet been conclusively defined and has to be evaluated by developers. It will take some time before bitcoin vaults becomes the standard, but the project already looks very promising.

About the author:

Matthias Oertli is consultant for crypto assets and blockchain technology at inacta AG in Zug. He also works as Business Development Manager for proofX AG and has been a member of the Crypto Valley Association in Zug since 2018. Since 2013 he has been intensively interested in and involved with Bitcoin and other cryptocurrencies.