Ten years ago, on January 3, 2009, Bitcoin inventor Satoshi Nakamoto laid the cornerstone of what will become a breakthrough in financial technology. On that day, he launched the Bitcoin network and mined the first block of transactions, now widely known as the genesis block.
In the hard code of the genesis block, Nakamoto left an important message to the world, explaining his reasoning behind the creation of Bitcoin & the blockchain: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
The message is a reference to an article published in the British newspaper The Times, about the 2008 financial crisis. The story covered the Head of UK’s Treasury decision to bail out banks and print even more money, to keep the economy afloat. Nakamoto strongly disagreed with such practices and gave the world an alternative to the fiat system: a new form of Peer-To-Peer digital money, with no central bank at the core. All could participate in the new decentralized system and, most importantly, each of the participants had full control of their funds. In other words, each of the participants had the keys to their own treasury.
Indeed, keys are an integral part of the Bitcoin’s ecosystem. Not physical keys though, but digital ones, so important in keeping the blockchain alive.
By using public-key cryptography, Satoshi Nakamoto created an anonymous and bulletproof online ledger shared around the world, with no single point of failure (a potential attacker would have to target many participants, from different parts of the globe, to even have a chance to succeed).
Public-key cryptography uses pairs of keys to encrypt any given message. In Bitcoin’s case, the message is the transaction and all the information related to it: the sender, the recipient, plus the sum involved.
There are two type of keys in any Bitcoin transaction: the public key and the private key.
As the name implies, anyone can easily access any given public key on the blockchain. It is not hidden, in fact, it is widely used across the network, in its common form known as the Bitcoin address.
The public key is not the Bitcoin address per se. More precisely, the address is the hashed version of a public key.
Hashing is a very common algorithm used in the cryptocurrency industry to compress large chunks of data into a fixed, distinguishable, much smaller piece of data.
For example, instead of going line by line to check if a document file has been modified, you can hash that file once you finish writing, as a security measure. The hash will look very similar to a Bitcoin address – a character concatenation with no apparent logic. When you return to the file, you can hash it once more and compare that hash with the initial one. If no change has been made, the hashes will be the same. However, if someone put an extra comma, the hashes will be different.
If you look into the content of a Bitcoin block, you will see hashes everywhere: from the block’s ‘name’ to transaction IDs and addresses.
Private keys are a different beast and very important in the economy of any cryptocurrency. It’s like a random-generated password, or, more precisely, a signature in the digital form.
Whenever you create a Bitcoin wallet, a private key associated with it, will also be created. Like the password or your signature, YOU AND YOU ONLY can use it. If someone knows your password, your data is compromised. If someone uses your signature, that someone can gain access to all your belongings.
It is of utmost importance to keep your private keys safe, away from your everyday PC or laptop and, if possible, away from any network connection (yes, including the Internet). That’s the only way your funds are really safe!
Whenever you send funds from your wallet to another, you will have to ‘sign’ your transaction with your private key to be valid, thus to be included in the blockchain.
No signature, no transaction.
It is important to know not all wallets give the user access to the private key. If this is the case, then the crypto funds aren’t really yours. Just like in the real-world financial system, if you have most of your wealth in your bank account, those specific funds aren’t actually yours.
Yes, you can withdraw the money, but, if the sum is large enough, you will have to justify why and you will have to pay a visit to the bank. Furthermore, if the bank files a bankruptcy and doesn’t get help from the Treasury, your money are history. The Treasury won’t bail you out, you know.
That is why you need to have access to the private keys of your wallet. If you have the possibility to SIGN a transaction for example, then you own the private keys and, as a result, you own your Bitcoin.
When you create a wallet and you see a phrase comprised of several English words (commonly known as a seed phrase), you own your Bitcoin. That seed phrase is directly associated with the private key and it’s also your way out IF the device you have the wallet gets damaged. You connect to another device, write your seed and voila, you control your Bitcoin wallet once more.
If you have a popular hardware wallet, you control your Bitcoin (plus your funds are safe, no matter the device you are using your hardware wallet with).
Nevertheless, if you have funds in a cryptocurrency exchange, you have no control anymore. Exchanges act like banks; whenever you create a wallet on an exchange, you only receive the address (aka hashed public key). Only the exchange knows the private key, and if something goes wrong – bankruptcy, hack – your funds may be lost forever.
The same applies with some online wallets. If you don’t see keywords like ‘private key,’ ‘sign,’ ‘seed (phrase),’ ‘back up wallet,’ your bitcoins aren’t truly yours.
To bring Nakamoto’s vision in today’s ecosystem, a group of Bitcoin enthusiasts created a special event that marked Bitcoin’s ten anniversary, called Proof of Keys.
The event encouraged every Bitcoin HODLER (those investors who keep Bitcoin in their portfolio, for the long run, no matter the market’s conditions) to store their crypto wealth in wallets they have full control (public + private keys), even if it is for a single day, the day the number #1 cryptocurrency was born, on January 3.
To mark the occasion, many withdrew their bitcoins from exchanges and placed them into their safe wallets. This way, investors could learn about the blockchain’s strong bulletproof security and participate in an unprecedented network consensus of true money ownership.
The events also provided a stress test to the whole network, plus a proof of the Bitcoin companies & exchanges’ reliability.
This year’s Proof of Keys was a real success.
Will next year bring even more consensus among the participants?