Unlocking the Potential of Bitcoin-Native Multisignature Capabilities

Manuel Trojovsky
Dec 15, 2020 · 27 min read

We are thrilled to announce that we participated in Unchained Capital’s seed round. The company is dedicated to the proposition that individuals and businesses should hold their own Bitcoin private keys while achieving the same level of security and reliability as institutional investors.

Unchained Capital provides financial services on top of its highly secure and innovative collaborative custody infrastructure tailored to the needs of long-term Bitcoin holders. It is a pioneer in Bitcoin-native multisignature solutions. In addition, the company also incorporates the lessons of recent financial history and the importance of sound money in its philosophy.

The United States Bullion Depository, better known as Fort Knox, stores over half of the U.S. gold reserves. In terms of numbers, the vault holds roughly 147 million troy ounces, or 4,580 metric tons of gold bullion. It is protected by the United States Mint Police, but it’s probably no coincidence that the United States Army post of Fort Knox is right around the corner too. At current prices of $1,830 an ounce, the stored gold is worth roughly $270 billion. The equivalent amount of bitcoin on November 30, 2020, the day it closed at a new all-time high, would have been 13.75 million bitcoin. While gold is cumbersome to carry and expensive to transport, the $270 billion in bitcoin could have been sent to any individual that has a Bitcoin address in next to no time, at virtually no cost. It is trivial to take physical delivery of bitcoin. In theory, a user has a free choice between $270 billion worth of bitcoin in self-custody, or with an intermediary. The ability to take physical, final ownership of one’s own cryptoassets is an incredibly powerful feature afforded to individuals. Bitcoin tilts the scale towards the individual, away from the State or the vagaries of global banks.

Narratives and Visions

In its twelve-year history, Bitcoin has undergone multiple shifts in dominant and prevailing narratives. While its skeptics have always doubted its ability to go mainstream, arguing that Bitcoin will not make it across the innovation chasm, it broke out in new directions multiple times. Dominant narratives ranged from early ones such as electronic cash, a peer-to-peer payments network and a darknet currency to more exotic ones such as a quote currency for the cryptoasset market. Many of those views were short-lived, ultimately coming to an abrupt end. Throughout its lifespan, however, Bitcoin has been considered “digital gold”, a trusted store of value that offers a safe haven in tumultuous times. The latter value proposition has been widely sustained in the broader community given Bitcoin’s relative scarcity and price appreciation relative to fiat currencies, along with the view that it is largely uncorrelated with other asset classes. While Bitcoin remains hard to pin down, store of value proponents appear to have gained the upper hand, not least since in times of money printing and record government deficits, the vision also seems to appeal to investors beyond supporters of the Austrian school or sound money believers. To those people, Bitcoin represents a non-sovereign, immutable, uninflatable, digital store of wealth which cannot be tampered with by governments or central banks. This majority view also tends to emphasize security, stable code and a slow pace in line with Bitcoin’s careful open-source ethos. Likewise, the store of value view deprioritizes Bitcoin’s use for cheap everyday payments and rejects the fast-moving, modular pace known from the Ethereum community outright. Early-on, the Unchained Capital founders demonstrated a prescient and in-depth understanding of where the Bitcoin narrative was headed.

On The Brink Of Adoption

Its potential to emerge as a dominant, non-sovereign monetary store of value that could be worth many trillions of dollars has become more palatable to institutional investors in 2020. While admittedly risky, the increased probability that it is heading for “digital gold” appears to be sufficiently high for many traditional investors to justify such a bet and to allocate a small portion of their assets to bitcoin with a long-term investment horizon. No doubt, the undisputed catalyst for Bitcoin this year has been the greatest monetary expansion in the modern era — an experiment that has even Wall Street veterans and chief global strategists questioning the dollar’s reign and the fiat system as a whole. Others have gone so far as to call it the next global reserve currency that will obsolete all other money. Fiat supremacy or not, Bitcoin will gain from widening distrust in fiat money and traditional alternatives that are often a poor hedge against inflation. These macroeconomic tailwinds are evidently boosting the resurgent interest in the industry, with large pools of capital actively seeking exposure to Bitcoin. It is no wonder that even former critics are now starting to acknowledge its usefulness in the current environment. Bitcoin is a rapidly growing monetary network that gets stronger and more valuable as more individuals, corporations and institutional investors embrace it. And companies are buying it to protect their treasury reserves and to increase shareholder value.

Long-term skeptics still hold that Bitcoin lacks adoption. They argue that speculation and sentiment continue to be the main driver of a highly volatile asset while fundamentals play just a minor part, or barely exist. This is a common misconception. When comparing today’s market structure with that during the previous bull runs, fundamental developments are hard to overlook and the financial infrastructure has matured notably. True, there’s been a marked shift in bitcoin purchasing volumes away from unregulated retail activity toward corporate and institutional buyers as well as clear evidence of large US investors entering the market. But the growth and quality of financial infrastructure enabling individuals and institutions to get exposure to bitcoin has undoubtedly paved the way for more adoption. Investors have benefitted from increased specialization and the unbundling of custody, exchange and brokerage functions in the form of new startups, ultimately resulting in more high-quality services. At the same time, the cryptoasset infrastructure is now much more intertwined with the traditional financial system and already meets many regulatory requirements. Only ten years ago, it was virtually impossible to buy bitcoin, and people’s only custody option was a paper wallet or Satoshi’s original Bitcoin Qt wallet. Today, people that buy bitcoin worth millions have the choice of securely self-custodying them or storing them with some of the world’s largest traditional custodians.

The importance of high-quality custody providers are often underappreciated and overlooked. The retail-driven market frenzy of 2017/2018 turned Bitcoin exchanges and their vulnerable infrastructure into prime targets for hackers. Attacks on these service providers continue to increase, with the total value of stolen funds peaking at nearly USD 900 million in 2018, according to Chainalysis. Meanwhile, crypto firms have become more risk-sensitive and current data suggests that custodianship is often outsourced. In a recent survey, 45% of respondents replied that they are using a third-party as part of their cold storage solution. Of those third-party providers, roughly two-thirds are crypto-native custodians but only 10% are banks.

With the price of bitcoin hitting new all-time highs, custody has gained center stage once again. However, there’s still a popular view within the non-Bitcoin crypto industry that any generic custodian will do the job. To meet the need of global institutions, some multi-asset custodians have overbuilt for a plethora of short-lived cryptoassets or an institutional framework of security tokens that doesn’t yet exist. When it comes to storing their bitcoin, even large bitcoin holders have been sympathetic to the idea of delegating custody of their coins to exchanges, while others have felt confident with their private keys stored on their phones. This has often resulted in catastrophic losses. At the more risk-averse end of the spectrum, many a long-term holder goes above and beyond with their security. Some of the more experienced people will assert that a combination of hardware wallets, factory-sealed PCs, casino-grade dice, Faraday bags and fire-proof metal seed storage devices are the only way to ensure the safety of your funds. Meanwhile, the number of addresses holding bitcoin — a fundamental driver of Bitcoin adoption — has recently seen fresh all-time highs, with at least 18 million wallets holding $10 of bitcoin or more. Amid the recent price appreciation, many bitcoin holders are now facing a comfortable situation where their bitcoin holdings represent a rapidly growing amount of their net worth, thus presenting themselves with the challenge of safely storing their bitcoin.

Custodians Enter the Age of Digital Assets

While there is broad consensus on its functioning as an insurance policy against the unclear outcome of current monetary and fiscal policy, at least inside the Bitcoin community, many an institutional investor considers Bitcoin’s comparison to gold to be flawed, or at least premature, in part because it makes the assumption that bitcoin is already at the level of gold. In reality, it’s probably closer to an emerging, non-sovereign store of value that still lacks a long history. While it may still be small by global assets standards this doesn’t change the fact that custody is important. There is no such thing as a bitcoin warehouse. And bitcoin custodians distinguish themselves in a few key ways from their counterparts in traditional finance, such as the behemoths that are responsible for safeguarding global financial assets. The custody industry has evolved into a complex industry in lockstep with modern financial markets. It is no longer characterised by physical safekeeping of assets like gold, but by offering a range of information and banking services. Given the multi-tier structure of the industry, custody services are provided by a variety of intermediaries. In the days when securities existed only in paper form, investors needed a safe place such as a bank vault, to keep these certificates of value. Nowadays, custody is offered primarily by brokers, investment banks and commercial banks. The world’s largest custodian banks, The Bank of New York Mellon and State Street Corporation each manage assets in excess of $30 trillion. These providers have developed specialised services that cater to different customer segments. Notwithstanding the digital age, the scope of their services in settlement and asset servicing remains relatively unchanged: 1. Settlement, that is, taking care of the delivery and receipt of securities in exchange for the agreed amount of cash (settlement); 2. Asset services, that is, providing services surrounding collection of dividends and interest, corporate actions, taxes and voting. Most of the activity takes place in asset servicing, with the custodian acting as an information intermediary, communicating between issuers and securities holders. In the past century, high trading volumes involved the movement of massive amounts of physical securities that could cause delays and errors that, in turn, would result in delayed settlement and could even give rise to liquidity problems in the financial markets. Physical certificates could also increase the probability of fraud and forgeries. As a result, some markets eliminated physical movements by setting up central securities depositories (CSDs). This was called immobilization. Similarly, advances in technology allowed securities to exist solely in electronic form, or so called dematerialization. In the US, the securities industry’s paperwork crisis in the late 1960s that overwhelmed the system triggered the immobilisation and book-entry transfer of securities by a central service provider. It led to the establishment of The Depository Trust Company (DTC) in 1973.

These global custodians have some really key advantages. Historically, custody has been an industry in which both trust and brands matter a lot. Large institutional allocators may be reluctant to trust any of the startups that specialize in the custody of digital assets. And that is not because they have no technical merit but mostly because they do not have a track record to show for. It takes a lot of institutional knowledge to do something critical as custody right. Traditional custodians have accumulated hundreds of years of institutional knowledge, especially around best practices of infrastructure security and risk mitigation. Humans have used safekeeping, vaults and other forms of physical security controls for thousands of years. In contrast, our experience with digital security is barely 50 years old. Today’s general-purpose operating systems such as macOS, Android or Microsoft Windows are not very secure. If anything, they are permanently exposed to external threats in the form of a constant connection to the internet. A single piece of malicious software can compromise a computer, keyboard or files. Hence, computers remain vulnerable to hackers and other skilled adversaries and are not well suited to storing money and digital assets. Centralized security models such as those found in the traditional banking system depend on access control and vetting to keep bad actors out of the system. At the heart of traditional security architecture is a concept called the root of trust: a trusted core constitutes the foundation for the security of the overall system while less trusted parts are located at the periphery.

Bitcoin’s native security architecture is different and it leaves the control to the users. This has important implications for security. It has little in common with the layered structure of traditional software architecture. In Bitcoin, the consensus system is based upon a trusted public ledger, or blockchain, that is entirely decentralized. This ledger uses the genesis block as the root of trust, extending the chain of trust up to the current block. Satoshi wrote that “The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes”. Bitcoin’s proof-of-work security requirements have been met almost from day one and so the Bitcoin protocol is better off using the blockchain as their root of trust. When building a complex Bitcoin application that involves services on many different systems, developers need to carefully put the security architecture to the test to ascertain where trust is being placed. A fully validated blockchain is the only part that should be trusted. Conversely, if an application explicitly or implicitly forgoes trust in the blockchain, this should be a cause of concern. As noted by Andreas Antonopoulos, “a bitcoin application without vulnerabilities should be vulnerable only to the compromise of the bitcoin consensus mechanism” — by far the strongest part of the bitcoin security architecture. In the past, many Bitcoin applications have misplaced trust in components outside the Bitcoin blockchain that were easily compromised — much to the detriment of security. The many hacked Bitcoin exchanges are a case in point. Their security architecture heavily relied on centralized implementations and components such as hot wallets, internal databases and vulnerable encryption keys.

The State of Bitcoin Custody

One of the great features of Bitcoin is that people can be their own bank. With only a modest amount of effort, they can make use of the Bitcoin protocol’s features to exceed the level of security offered by traditional financial institutions. However, in the absence of appropriate precautions, these native features can also be a material weakness. Cryptoassets are very paradoxical, in part because while similar to bearer assets, they ultimately are just strings of information. Since Bitcoin resembles a bearer instrument, it can be held independently and apart from any third party. While holding bitcoin does not give a bitcoin holder any rights against any tangible issuer, possession (via private keys) does entitle bitcoin holders to spend at their discretion — that is, the Bitcoin protocol automatically executes transactions once initiated by a rightful owner. This illustrates that holding bitcoin is in fact associated with some sort of underlying right against some sort of issuer, the Bitcoin protocol.

Also, recall that bearer assets cannot be recovered if lost or stolen. It turns out that securing and custodying a string of letters and numbers is extremely challenging and complex, particularly for the everyday user. What’s more, Bitcoin is not an abstract reference to value like a balance in a bank account. Rather, Bitcoin is tantamount to digital cash or gold. The expression “possession is nine-tenths of the law” suggests that ownership is easier to maintain if one has possession of something. Bitcoin pioneer Andreas Antonopoulos quips that “in [B]itcoin, possession is ten-tenths of the law.” What he means is that possession of the private keys gives users full control of their bitcoin equivalent to physical possession of cash or a piece of gold. No matter if it’s lost, stolen or misplaced, users have no recourse. But here’s where Bitcoin is different. It has capabilities that neither gold nor cash have. Both cannot be backed up. In Bitcoin, a wallet that contains a user’s private keys, can be secured like a file and stored in multiple copies. Bitcoin is different enough from anything that has come before, we thus need to think about Bitcoin security in a novel way too. Hence, it forces us to think about its security and custody in a novel way.

The number one rule to storing bitcoin is this: unless users hold their private keys, they do not actually own their bitcoin. Key management determines how Bitcoin is held and secured. Anything less than holding private keys means that bitcoin is ultimately controlled by someone else, which to some extent conflicts with Bitcoin’s raison d’etre. As a result, community members do not recommend storing bitcoin with custodial online services such as an exchange or a web wallet. Some of the early exchanges concentrated all user funds in a single “hot” wallet with keys stored on a single server. Such design removes control from users and centralizes control over keys in a single system, thus creating enormous “honey pots”. Many such systems have been hacked, with disastrous consequences for their customers. That is not to say that every bitcoin holder is comfortable or capable of managing their private keys. Bitcoin’s decentralized security model puts a lot of power in the hands of the users. With that power comes responsibility for maintaining the secrecy of the keys. For most users, that is not easy to do, especially on internet-connected smartphones or laptops. Private self-custody is full of pitfalls, especially when it comes to protecting against the loss of keys. Users must therefore safeguard against the loss due to robbery, theft, seizure, human error, device failures and natural disasters.

The Custody “Trilemma”

In practice, storing bitcoin is all about the safekeeping and managing bitcoin secret keys. Narayan et al. recommend contemplating bitcoin self-custody with three goals or requirements in mind: 1. availability, 2. security, 3. convenience. Availability means the ability to spend your coins when you want to. Security means making sure that nobody else can spend your coins. Convenience means managing your private keys should be fairly easy. Needless to say, satisfying all three requirements at a high level is challenging, if not impossible. Different approaches to key management offer different trade-offs between availability, security, and convenience.

Cold storage is arguably one of the most secure ways to store bitcoin. In the context of self-custody goals, it emphasizes security and to some extent convenience. This means that Bitcoin keys are generated and stored offline, either on paper or on digital devices such as a USB memory stick. So-called brainwallets are particularly risky examples in that they require memorizing a seed phrase. If a brainwallet is forgotten or the person dies, the secured bitcoins are lost forever. This type of physical storage is primarily intended for individual holders or digital asset custodians who do not actively trade their bitcoin. It offers a high level of protection for bitcoin holders because private keys are never stored on networked computers. Cold storage should therefore be considered as an option for everyone who is managing digital assets. It can be the secure foundation for a more complex setup that also involves hot wallets, offering the maximum security for the portion of funds that do not need to be actively available at all times. One approach that clearly prioritizes security over availability and convenience is the Glacier protocol. It’s designed chiefly for protecting large amounts of bitcoin that will sit idly for long periods and caters to experienced bitcoin holders. The Glacier protocol is different from other cold storage approaches in that not even the manufacturers of hardware wallets are trusted. To mitigate attacks ranging from malware installed on hardware at its source to attacks during setup, it requires a long list of factory-sealed hardware devices which makes its setup fairly expensive.

The Power of Multisignature

Whenever a company or individual stores large amounts of bitcoin, they should consider using a multisignature Bitcoin address. Multisignature, or multisig, is a digital signature scheme which allows a group of users to sign a single document. Instead of taking a single key and splitting it, the Bitcoin script provides the flexibility to control an address that is split among different keys. Multisig addresses secure funds by requiring more than one signature to make a payment. The signing keys should be stored in a number of different locations and under the control of different people. In a corporate environment, for example, the keys should be generated independently and held by several corporate executives, to ensure no single person can compromise the funds. Multisig addresses can also offer redundancy, where a single person holds several keys that are stored in different locations. If you take into account the design space of all the possible ways investors can hold bitcoin, it is probably the best blend of availability, security and convenience. It might not be perfectly secure and convenient, but it is likely the single best trade-off. Over the past years, as a direct result of Bitcoin adoption, we have seen tremendous innovation in the realm of multisig technology.

At its most basic level, a 2-of-2 multisig is the most obvious analogue to a physical scenario where a banker and a customer might exercise dual control to open a safety deposit box that requires two keys: one that the bank gives to the customer and another one that the bank keeps itself. Without these two keys, the box cannot be opened. For digital custodianship, dual control can easily be represented with a multisig, which requires two or more people to sign off on cryptocurrency transactions. Since Bitcoin-multisig easily allows increasing the number of possible signers (without increasing the number of required signers) this can mitigate issues of key fragility (i.e. accidental key loss). Generally, increasing the number of required signers will increase the security at the expense of fragility. Likewise, increasing the number of possible signers will decrease the fragility at the cost of security. A 2-of-3 multisig is considered a good compromise, where any two people from a group of three can sign off on transactions.

Generally, multisignature scripts set a condition where N public keys are recorded in the script and at least M of those must provide signatures to unlock the funds. This is also known as an M-of-N scheme, where N is the total number of keys and M is the threshold of signatures required for validation, also known as the quorum. The Bitcoin script directly gives users the ability to split the control over an address among different keys. These keys can then be stored in different locations, and the signatures produced separately. The completed, signed transaction will then be constructed on a given device. The device might fall into the hands of or be controlled by an adversary. But even if an adversary controls this device, she cannot produce valid multisig transactions without the involvement of the other devices. For example, suppose that Alice, Bob, Carol, Dan and Erin are co-founders of a company that owns a lot of bitcoin. They use multisig to protect their large bitcoin holdings. Each of the five of them will generate a key pair, and they will protect their cold storage using 3-of-5 multisig. This means that 3 of them must sign to create a valid transaction. Assuming that the five keys are kept separately and secured differently, the company’s bitcoin would be fairly secure. To steal the coins, an adversary would have to compromise 3 out of the 5 keys. Similarly, even if two of the co-founders were to go rogue, the bitcoin would still be safe. At the same time, if one of them loses their key, the others can still get the coins back and transfer them to a new address and re-secure the keys. Hence, multisig facilitates managing large amounts of coins in cold storage in a secure way and mitigates risk by requiring action from several people in order to reach the quorum. In a corporate setup, for example, the keys should be generated independently and held by several key executives, to ensure no single person can get a hold of the funds. Multisig addresses also allow for redundancy, where a single person holds several keys that are stored in different locations.

Importantly, multisignature in the context of Bitcoin is complex. It is therefore important to distinguish between do-it-yourself approaches and third-party solutions. Users that set up their own multisig wallets are susceptible to losing their assets which is why they need to exercise extreme caution. While these solutions might be inexpensive, they require a high level of technical expertise. A do-it-yourself multisig wallet is essentially software running on a computer. In the event of a user losing her device in a 2-of-3 multisig setup, all three keys are required to restore the wallet. This is in contrast to a quorum when simply signing a transaction. Backups therefore need both the seed phrase of the hardware wallet and the XPUB (i.e. a master public key used to generate all addresses for an account in a hierarchical deterministic wallet) of each hardware wallet.

The Perils of Institutional Custody

All this suggests that custody is not easy, and cold storage via hardware wallets is not for everyone. Even the most intuitive and neat solution to the above-mentioned trade-off between availability, security, and convenience cannot belie the fact that certain groups need an even more flexible, pragmatic and institutional-grade custody solution. This is particularly true for large investors, corporations or family offices where private keys need to be handled by several persons. What’s more, digital custodianship falls under fiduciary law. Large institutional investors typically cannot self-custody their bitcoin. For example, the SEC requires that the traditional Registered Investment Advisor (RIA) model uses an external qualified custodian to custody amounts larger than $150 million, although it remains somewhat unclear if these regulations apply to bitcoin as the SEC has ruled that bitcoin is not a security.

In the institutional custody realm, the two most common forms are 1. omnibus and 2. segregated. The latter can be viewed as one that separates and accounts for client assets at all levels, ideally offering separate private and public key pair groups on-chain. Under a segregated model, the custodian has less control over the process and risk parameters. On the other hand, the omnibus model is an alternative way to record and maintain client holdings in the custody business. In the traditional securities services industry, omnibus — or “nominee” accounts — in which assets are held in the name of the custodian (as opposed to the “named accounts” of the underlying beneficial owner) have long been the status quo. As outlined by Fidelity Digital Asset’s Ria Bhutoria, a cryptoasset custodian that uses the omnibus model combines clients’ assets and spreads them across multiple private and public key pair groups. To keep track of the assets, the custodian establishes client-by-client segregation at the books and records level.

An institutional-grade digital asset custodian distinguishes itself in a few ways from traditional custodians in the securities industry. First, the function of custodian and depository is synonymous. Custodians store digital assets such as bitcoin in proprietary hot and cold storage rather than outsourcing the function to a depository. The requirement on digital asset custodians to implement robust storage processes is heightened as bitcoin are bearer instruments that cannot be recovered if lost or stolen. Once the client is onboarded and assets are transferred to the custodian, the custodian is at liberty to move the assets around. Importantly, the omnibus model of digital asset custodians, although more centralized, is not to be confused with an off-chain, internal and centralized ledger that only occasionally synchronizes bitcoin to the blockchain and takes it out of the native and decentralized security context. Under the cryptoasset omnibus model, a custodian will typically keep the vast majority of funds in cold storage.

On the downside, these custodians centralize risk and perhaps more importantly, they commingle bitcoin. Commingling means that a custodian will hold bitcoin in a commingled, or omnibus account, rather than segregating them for each client in their own wallets. One of the advantages of Bitcoin is its transparency and auditability as every single transaction is visible and stored forever. Bitcoin is designed to settle on-chain and gross, not netted, off-chain and in delayed fashion which is common practice in the securities industry.

In some cases, these custodians even rehypothecate funds. The practice of rehypothecation stands in stark contrast to the Bitcoin ethos of controlling your own keys. It is the process by which a lender receives an asset as collateral for a loan, and then pledges that collateral to cover its own exposure to a different party, which then pledges that same collateral to yet another different party, and so forth. At the end of the day, it becomes all but impossible to determine how many fractionally-reserved assets have been created within the financial system. In Bitcoin, many consider this a misguided effort. As pointed out by Caitlin Long in an enlightening article on the practice, “regulations force many institutional investors to store assets centrally and trade with central counterparties — they really can’t trade P2P in the same way individual bitcoin owners can”.

Unchained Capital: Next-level Bitcoin-Native Multisignature

Unchained Capital sets out to build the best multisig custody solution for long-term bitcoin holders. At the core of Unchained’s products is a platform that revolves around individuals and businesses holding their own keys. Current data indicates that the portion of bitcoin held on exchanges has been rapidly decreasing, suggesting that people want to hold their keys in cold storage. Meanwhile, on-chain data such as “HODL waves” show that 45% of bitcoin has not moved in two years, corroborating the notion that the bulk of holders consider bitcoin a long-term investment. Bitcoin is only as safe as the procedures of its custodian. Unchained Capital is well aware that if people are going to secure a material percentage of their assets in this digital form of money, they need to be very secure and comfortable that their wealth won’t disappear overnight. Using the built-in tools that Bitcoin so handily provides — Bitcoin-native multisig — makes its custody solution the most secure way to hold it. Multisig has increased fault tolerance, meaning people can make a mistake without losing bitcoin. Going forward, we believe that Unchained’s multisig approach will be the standard for those that facilitate self-custody. Not only does the majority of long-term Bitcoin holders find greater security in holding their own private keys, but there will be rising demand for financial services to leverage people’s personal bitcoin holdings. Unchained Capital gives individuals, businesses and institutions choice and real alternatives by building a state-of-the-art custody platform, called collaborative custody, that layers financial services on top of it.

If you are a long-term bitcoin holder, you can easily use Unchained Capital’s institutional-grade multisig vault. Users remain in control of their keys while their bitcoin always sit in cold storage. Unchained’s website makes it easy to upload a user’s public keys, build new vault addresses, customize who holds them and coordinate transaction signing. Its vaults are based on 2-of-3 multisig addresses. This means 2 keys are required to move funds and 1 key serves as a backup. Under its collaborative custody model, Unchained Capital is able to cosign transactions upon request or in the event that users lose a key. The low-fee equally appeals to individuals, small funds & businesses.

For a real-life example of what Unchained’s collaborative custody platform looks like, here’s how Tantra Labs secures its bitcoin holdings in cold storage. Tantra specializes in algorithmic bitcoin trading strategies to deliver enhanced yield-based products to their clients. Through collaborative custody, Tantra remains in ultimate control of the assets under management while eliminating counterparty risk and benefitting from the security of Unchained’s distributed key management architecture. Tantra’s keys are geographically distributed to improve security, financial controls, and redundancies, with transactions and signatures coordinated via Unchained’s private application and key management software.

Figure 1: Unchained Capital collaborative custody example. For the bitcoin held in cold storage, Tantra controls 2 out of 3 keys and Unchained controls 1 out of 3 keys. At all times, Tantra can rely on Unchained as a backup key holder.

Bitcoin Integrated Financial Services

Bitcoin makes for high-quality collateral. As the asset becomes less volatile and the price continues to appreciate, holders that are naturally long will be able to use that store of value for a rainy day, or to generate additional return without having to sell it. They will want to hold it and save it rather than a currency that is depreciating. Bitcoin’s comprehensive auditability, i.e. the feature that everyone can verify that somebody has it, provides excellent conditions for collateralized lending or borrowing against it.

If users need to access dollar liquidity but do not want to sell their bitcoin, they can simply post bitcoin as collateral to take out a dollar-denominated loan. Unchained Capital is the only company that offers integrated financial services such as collateralized loans with a custody platform that is built on the foundation of clients controlling private keys. Individuals or businesses that expect the value of their bitcoin to increase can simply leverage their bitcoin holdings to get a loan. In addition, selling bitcoin in certain countries incurs capital gains taxes, so these loans are a tax-efficient option to obtain liquidity without having to sell. The offering stands out in that it also leverages multisig capabilities: all bitcoin collateral backing US dollar loans remains cold-stored in dedicated multisig addresses, while no collateral is rehypothecated. Thus, borrowers don’t have to trust Unchained since this offering continues to rely on using 2-of-3 multisig where Unchained holds a single key, the borrower holds a key and a third (independent) party or intermediary holds the third key. This means that no single individual can unilaterally move funds. Thanks to the transparency and auditability of segregated accounts, clients can validate that the bitcoin is not being rehypothecated, and the address stays the same which creates trust. The company also launched a “buy bitcoin” pilot in selected US states where new clients can purchase OTC-sized amounts directly into collaborative custody multisig vaults.

Figure 2: Unchained Capital bitcoin-backed loan example: Unlike traditional banks and brokers, Unchained does not lend out client assets that have been posted as collateral.

Unchained plans to roll out additional financial services down the road as bitcoin becomes more financialized. For example, collaborative custody will also allow its clients to lend out their bitcoin via a similar multisig construction. Using a 2-of-3 multisig where the bitcoin lender (i.e. the Unchained client) holds a key, the borrower (e.g. a trading firm or exchange) holds a key, and Unchained Capital holds a key. That way, bitcoin can then be put to productive use on exchanges to provide liquidity without having to move.

A Well-Timed Product Pipeline

As Unchained ramps up efforts to tap into new markets, the list of upcoming features is rapidly growing, and 2020 is testament to its ambitions. The company recently launched its Advanced Business Accounts, a new business suite that gives businesses a highly-secure custody option and allows multiple members within an organization to easily collaborate with each other, among other things. Committing to its open-source ethos, Unchained Capital also continues its tradition of building secure and easy-to-use tools. The recent collaboration with SathoshiLabs, creator of the Trezor wallet, was made possible because Trezor uses an open-source architecture that anyone can build upon. By using Trezor’s new on-device confirmation feature, the addresses involved in a transaction can now be verified without customers having to rely on what they see in their browser. Unchained also launched their support for Coldcard devices in 2020 which offers its vault and loan clients a wider choice regarding the hardware wallets used in its multisig setup. Clients are now able to use Coldcard devices in their multisig quorum alongside Ledger and Trezor hardware wallets. The company continues to be at the forefront of trust-minimized open source software dedicated to multisig adoption and the development and convergence of multisig standards. In late 2019, the team released Caravan, a game-changing tool that facilitates spending from multisig addresses in a web browser. Importantly, it also provides users with a critical backup channel to recover multisignature funds completely external to Unchained or from any other wallet. Unchained has since released a powerful and user-friendly update that solves compatibility issues among users, developers, wallets. To help groups of people safely manage and use Bitcoin private keys, Unchained released an open-source, sharded, air-gapped wallet called Hermit. Using a standard known as SLIP-0039, Hermit protects single private keys by splitting each key into one or more encrypted shard families.

The Unchained Capital team is firmly rooted in Austin’s Bitcoin community — one of the largest, most knowledgeable and vibrant communities in the world, spanning Bitcoin pioneers, grassroots projects and blockchain venture funds. Each month, the company is hosting the Austin Bitcoin Meetup, one of the world’s most prominent gatherings in the space and attended by some of the world’s most capable Bitcoin developers and thought leaders.

The two co-founders, Joe Kelly and Dhruv Bansal, are passionate entrepreneurs that have worked together for more than ten years ever since they founded their first successful startup together. Since starting their journey at Unchained, they have demonstrated exceptional passion, an appetite for risk and great adaptability. They’ve built a thriving company culture in line with Bitcoin’s open-source ethos. Joe is a prescient CEO with a down-to-earth approach and outstanding operating and financial capabilities who put together a competent team. Dhruv is a tech-savvy data-scientist and physicist turned serial entrepreneur. He is a highly respected forward thinker in the Bitcoin community, not least since introducing the widely used “HODL Waves” Bitcoin metric in 2018 and his foray into bitcoin astronomy. The founders have attracted outstanding talent to their team. Parker Lewis, Unchained’s Head of Business Development, has received worldwide praise for his enlightening “Gradually, Then Suddenly” series — widely regarded as one of the most useful resources when studying Bitcoin. In fact, it was among the reading materials that prompted MicroStrategy’s CEO Michael Saylor to buy almost half a billion US dollars worth of bitcoin as a treasury reserve asset. Chief Product Officer Will Cole, former VP Product at Stack Overflow and member of the Wyoming Blockchain Taskforce, was another key hire.

Unchained’s addressable market is enormous, yet it remains somewhat underserved. In the US alone, the market spans the bulk of non-custodial bitcoin that is held by individuals, businesses and funds not subject to the qualified custodian rule. With bitcoin accounting for an increasingly large portion of individuals’s net worth, investors are starting to look for more secure ways to store their bitcoin. Thanks to its custody platform, Unchained can also tap into the rapidly growing bitcoin financial services business (i.e. lending, borrowing, purchasing) which will help boost recurring revenues.


Unchained Capital follows a security-first approach that emphasizes reputation, credibility and the open-source ethos inherent to Bitcoin. Its multisig custody platform is based on a profound understanding of Bitcoin security standards and private-public key cryptography. By building on its reputation in the storing of private keys and its financial markets expertise, the capable team has also identified the vast potential of bitcoin financial services as a second pillar of its business model. Bitcoin is entering a phase where holders need highly-secure and flexible solutions around storage, borrowing, lending and inheritance, to name but a few. Unchained sets out to solve both individuals’ and businesses’ needs for these challenges. Given their institutional-grade custody platform, Unchained also appeals to the long tail of smaller companies that have started to shift some of their treasury assets to bitcoin.

Signature Ventures is proud to support the Unchained Capital team on their journey.

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Signature Ventures Blog

Early-stage venture capital fund with a focus on equity investments in the technologies of digital decentralization such as Blockchain/Distributed Ledger Technology (DLT). Based in Munich and Berlin, the fund invests in Pre-Seed to Series A, globally with a focus on Europe.

Manuel Trojovsky

Written by

Principal, Signature Ventures

Signature Ventures Blog

Early-stage venture capital fund with a focus on equity investments in the technologies of digital decentralization such as Blockchain/Distributed Ledger Technology (DLT). Based in Munich and Berlin, the fund invests in Pre-Seed to Series A, globally with a focus on Europe.