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HomeVenture CapitalPockets Safety: The 'Non-Custodial' Fallacy

Pockets Safety: The ‘Non-Custodial’ Fallacy

The generally cited expression “not your keys, not your crypto” conveys the purist’s philosophy of cryptographic key administration. On this pockets safety mannequin, solely a person (or a bunch through “multisig”) has direct and sole management over their very own personal keys – and, due to this fact, has true possession of their crypto property. Crypto wallets adhering to this hard-line strategy are known as “non-custodial,” that means no outdoors events have entry to keys.

Besides, not so quick. The scenario isn’t so easy. Quite a lot of high-profile “non-custodial” pockets hacks – together with the Slope pockets hack that compromised greater than 8,000 accounts in August, the Trinity pockets hack that misplaced greater than $2 million price of IOTA tokens in 2020, the Parity pockets hack that allowed an attacker to steal 150,000 ETH in 2017, plus discoveries of varied {hardware} pockets vulnerabilities, and different incidents – undermines the standard distinction between custodial and non-custodial wallets. In lots of of those circumstances, victims who believed they had been utilizing a non-custodial pockets discovered attackers had been in a position to hijack their coveted keys. A contradiction, no?

Certainly, the story is extra complicated than a catchphrase can seize. Non-custodial wallets do not likely put customers in full management of their keys. That’s as a result of wallets are usually created by, and operated through, another person’s software program or {hardware}. Customers continuously put their belief in different individuals, merchandise, and laptop applications. They settle for utilizing blockchain command-line-interfaces, pockets software program and units, centralized platforms, sensible contract code, decentralized purposes, and all the assorted pockets connection integrations in between. Every touchpoint provides threat; the sum of all these interlocking components shatters the phantasm of the non-custodial pockets.

Custodianship is, in actuality, nonbinary. What may at first seem like non-custodial may very well contain many custodial parts whose reliability individuals usually take without any consideration. The standard dichotomy – custodial vs. non-custodial – is a false one. 

As a substitute, it’s higher to treat wallets with extra nuance. The important thing inquiries to ask are: How massive an assault floor am I comfy accepting, and what number of duties am I keen to tackle in my quest to remove belief in third events? On the whole, key administration – the muse of pockets safety – could be divided into three areas, every of which has distinctive alternatives for publicity. The subcategories are as follows:

  1. Key technology (creating cryptographic keys)
  2. Key storage (securing keys at relaxation)
  3. Key utilization (placing keys to work)

This overview is meant to assist web3 customers higher perceive the intricacies concerned in securing their property by means of the rubric above. Additional, we goal to assist engineers determine and shore up frequent factors of failure in pockets growth. We hope that making use of this information – sourced from our a few years of mixed expertise constructing crypto and safety methods throughout Docker, Anchorage, Fb, and a16z crypto – will assist individuals to keep away from safety mishaps, whether or not they’re interacting with, taking part in, or constructing web3 tech.

Under, we cowl frequent options and pitfalls of crypto pockets safety and custody platforms as they exist right this moment. We additionally cowl areas we imagine require essentially the most consideration and growth within the coming months and years to enhance the protection of customers’ web3 experiences.

Key technology pockets safety

Any dialogue of pockets safety should start with key technology, the method of making cryptographic keys. Whether or not the pockets is taken into account custodial or non-custodial, the safety properties of the important thing technology step are paramount to the keys’ security thereafter. Throughout key technology, there are three overarching issues to bear in mind: utilizing dependable code, implementing the code correctly, and safely dealing with the output.

Should you’re not a crypto skilled, it may be troublesome to confirm that all the following elements are being achieved by the guide. Test to see whether or not you’ll be able to entry a trusted audit report, which some pockets suppliers publish on their official web sites or Github repositories. In lieu of that, do your personal analysis to attempt to decide whether or not there’s a good firm behind the pockets. If data is sparse, vital person and developer exercise may be the following indicator of reputability.

Observe these tips to scale back your threat publicity. If a pockets fails the beneath checks, run away!

  • Use wallets that don’t roll their very own crypto

Cryptographers have a saying: “don’t roll your personal crypto.” The gist is much like the adage “don’t reinvent the wheel.” The wheel is ok as is and any try to rebuild one from scratch is more likely to lead to a worse product. Similar goes for crypto, a science that’s exhausting to get precisely proper. The code composing a pockets ought to have a popularity for working properly. Selecting poorly written software program – or trying to develop one’s personal different de novo – can result in mishaps corresponding to key leakage or revealing secret data to unauthorized events. That is what was behind a not too long ago exploited vulnerability in Profanity’s self-importance deal with instrument. Earlier than the rest, it must be clear the pockets in query makes use of an audited and respected key technology library and course of.

  • Use wallets that measure twice and lower repeatedly

Even when the code makes use of respected cryptography libraries, it nonetheless should be built-in correctly. Vetted software program will usually arrange appropriate parameters by default, however there could be gaps in execution. As an example, a robust supply of entropy, or dose of mathematical randomness, is required to make to-be-generated keys unpredictable and, due to this fact, safer. For sure key technology processes, corresponding to for a lot of Multi-Occasion Computation (MPC) algorithms, wherein many separate keys – or shards, fragments of keys – should be generated and coordinated, the pockets should observe the exact protocol as specified by the algorithm. The algorithm can also require a number of rounds of computation in addition to refreshing keys, which the pockets should combine correctly to keep up the safety of the funds.

  • Use a pockets that may preserve secrets and techniques

The ultimate part of the important thing technology course of includes the precise operation and output of the software program. Pay attention to the place the keys are being generated and in what type.

Ideally, the keys must be generated in remoted {hardware}, and the knowledge must be encrypted with a good algorithm. An instance of a weak one to be prevented is Knowledge Encryption Commonplace, or DES, which is right this moment thought of damaged. Keys left in plaintext – particularly in reminiscence, on-disk, or within the middle-zone between these two locations referred to as “swap” – are a serious safety threat. On the whole, key materials mustn’t depart the {hardware} it’s generated on and mustn’t escape onto networks accessible by others. (That’s, until the important thing materials is encrypted, wherein case the encryption key should be secured too.)

The keys for Slope, the pockets that received hacked this summer time, had been logged in plaintext to outdoors servers after being generated. That is the sort of safety lapse that might have surfaced in an audit or open supply implementation of the code. Wallets that lack transparency – that includes closed-source code, no out there third celebration safety audits to the general public – ought to increase pink flags. 

Key storage pockets safety

After keys are generated, they may must be stashed someplace – by no means in plaintext, at all times encrypted. However merely proudly owning the machine on which keys are saved doesn’t essentially equate to key possession and management. Many elements corresponding to the availability chain safety of the machine, how linked the machine is, and what different elements the machine interacts with should be thought of. Moreover, every storage methodology has its personal set of trade-offs between safety, accessibility, maintainability, and usefulness.

Under, we break down the commonest classes based mostly on their related degree of perceived threat. 

Greater threat: “scorching” wallets

The idea doesn’t even have a lot to do with temperature. With regards to key storage choices, a pockets is taken into account “scorching” if it’s linked to the web. A pockets is taken into account “chilly,” then again, if it’s offline and remoted. All else being equal, chilly wallets are safer than scorching wallets – however they’re additionally harder to entry and use. A pockets that’s linked to any community is extra vulnerable to hacks because it permits attackers extra possibilities for entry to find and exploit vulnerabilities.

Sizzling wallets can take a couple of kinds.

  • Related software program: on-line databases, cellphone or internet server software reminiscence, browser extensions

These are the riskiest choices. Right here, the pockets software program, custodial or not, has direct entry to the keys – all whereas being linked to the surface web. The keys ought to ideally be encrypted, and the opposite set of keys used to encrypt them must be saved in a devoted key administration system (KMS) with extremely restricted entry controls corresponding to an working system keychain or a cloud key administration system.

For software-based scorching wallets, it’s crucial to isolate the important thing administration and authorization from the remainder of the software program elements. Issues can crop up in logging, error administration, and reminiscence administration (particularly heap-based, the place keys might not be correctly “zeroized,” or erased), all of which might mistakenly leak passwords, encryption keys, signing keys, or different delicate cryptographic materials. When that occurs, interlopers can acquire unauthorized entry by way of linked purposes or internet servers, aspect channel assaults, or insider threats.

Regardless of how a service labels itself, if the signing keys are unencrypted at any time within the on-line system’s reminiscence, then the mannequin must be thought of a scorching software program pockets. (Even when the keys are later saved at relaxation in a safe enclave.)

  • Related {hardware}: special-purpose units, cellular safe enclaves, on-line {hardware} safety modules (HSM)

Related {hardware} is mostly thought of much less dangerous than linked software program, but it surely’s nonetheless not as safe as chilly storage. In linked {hardware}, keys are generated and stay solely inside special-purpose {hardware} units. These can then be linked both to inner or public networks. Such units usually tackle a number of duties associated to key administration, together with safety for key technology, signing, and storage.

Related {hardware} is available in a number of varieties. There are {hardware} wallets, corresponding to Trezor and Ledger units, which barely extra subtle crypto customers generally use. (Many extra individuals must be utilizing these units, as they’re vastly safer than utilizing linked software program alone.) There are additionally {hardware} safety modules, or HSMs, that are generally utilized in extra conventional enterprise settings corresponding to ones that deal with delicate information processing, like bank card funds.

Gadgets are solely as protected as the availability chain that produced and configured them. When contemplating linked {hardware}, ask your self: What’s the chance that both the units – or firmware – had been tampered with earlier than coming into your possession? To cut back this threat, it’s finest to purchase units immediately from trusted distributors. Have them shipped immediately from the supply. Make sure that the packages don’t seem like compromised – no rips, tears, damaged seals, and many others. – which could point out tampering amid transport. It’s additionally advisable to confirm the firmware model and configuration earlier than use. The steps to take action range relying on the {hardware}, however all ought to present directions.

After all, there’s at all times the chance {that a} {hardware} pockets might later be stolen or accessed by an unauthorized celebration. Given these threats, it’s vital to ensure {hardware} wallets even have safe entry management layers – safeguards guaranteeing they aren’t simply blindly signing any and all transactions. Controls can embody password necessities, prompts asking for specific permission for each step of a transaction, and plain English summaries describing what transactions are literally doing. As well as, most {hardware} wallets help personal key encryption, often known as “key wrapping.” Even higher, safe wallets is not going to enable keys to be exported in uncooked plaintext type, even when one wished for them to be.

That is the extent of security that’s required to really safeguard crypto property.

Much less dangerous: “chilly” wallets

Much less warmth, decrease threat. Chilly wallets are, all else being equal, usually thought of safer than scorching ones, although they’re additionally usually much less usable. Chilly wallets are generally known as “airgapped” wallets, that means they haven’t any connection to any inner or public community.

Loneliness is a advantage on this case. Airgapping includes implementing rigorous bodily isolation and authorization measures. These measures can embody the usage of Faraday cages (shields that block wi-fi alerts), biometrics entry (like fingerprint or iris scanners), movement sensors (to journey alarms in case of unauthorized use), and SCIFs, or Delicate Compartmented Data Amenities (particular areas for processing labeled data).

Let’s assessment some chilly pockets choices in additional element.

  • Airgrapped software program: offline server software

As a result of an attacker can steal or take a machine on-line at any time, chilly wallets must be designed with safety methods that maintain up even when they’re introduced on-line. Keys must be break up in key shards – requiring the items to be rejoined to be made usable – by way of a typical methodology, corresponding to Shamir’s Secret Sharing or Multi-Occasion Computation. Particular goal {hardware}, corresponding to HSMs, are extremely really helpful over linked software program as they often provide extra controls.

  • Airgrapped {hardware}: offline {hardware} pockets, offline {hardware} safety module (HSM)

This resolution is taken into account the most secure of all. Much like the earlier class, one ought to assume the {hardware} could be stolen and brought on-line. For that motive, it’s vital once more for these methods to incorporate correctly applied entry management layers, as mentioned earlier. Many HSM distributors require a quorum of bodily smartcards to return collectively earlier than entry to keys could be unlocked. Even when the machine doesn’t have a show display screen, it ought to provide a way for customers to confirm the main points of transactions.

As a result of chilly or airgapped wallets are the most secure class, most funds managed by massive gamers are saved on this method. Main retail providers, corresponding to Coinbase, Gemini, Kraken, and others, in addition to providers for institutional customers corresponding to Anchorage, are amongst people who accomplish that. Many of those gamers select to have one other line of protection within the type of backups and restoration, simply in case – heaven forbid – they lose entry, or machines are corrupted, stolen, or destroyed.

Backups and restoration

Signing keys ought to at all times be backed up after being encrypted. It’s crucial to have redundancy of each encrypted signing keys and key-wrapping keys. Strategies to again up a signing key differ, however one ought to at all times favor {hardware} native options.

For {hardware} wallets, backups normally contain a 12-word plaintext seed phrase from which personal keys are derived. This seed phrase must be saved non-digitally (assume paper, steel) and in essentially the most safe means out there (a bodily vault at house, inside a financial institution vault). The phrase could be break up into components which can be geographically distributed to forestall simple compromise of your entire secret. (Folks generally clarify this strategy by referencing the fictional horcruxes which darkish wizards use successfully to “backup” their souls in Harry Potter.)

Many HSMs natively deal with among the challenges associated to backup and restoration. Commonplace ones have mechanisms that may export keys which can be, by default, encrypted with entry controls. If the entry controls are glad, keys can then be imported into different HSMs. Usefully, fleets of HSMs may also be provisioned with a standard encryption key, derived from a quorum of smartcards. Decoupling the {hardware} from the important thing supplies on this method helps keep away from single factors of failure.

Lastly, human elements want addressing. Restoration mechanisms ought to be capable of face up to the momentary or everlasting unavailability of any particular person concerned in account administration operations. People ought to ensure to supply methods for shut members of the family or different trusted events to get well keys in case of dying or different emergencies. Group operations, in the meantime, ought to outline a quorum – corresponding to 2-out-of-3 or 3-out-of-5, say – that may moderately function regardless of life occasions, journey, sickness, or accidents.

Key utilization pockets safety

After keys are generated and saved, they can be utilized to create digital signatures that authorize transactions. The extra software program and {hardware} elements within the combine, the better the danger. To cut back threat, wallets ought to abide by the next tips for authorization and authentication.

Wallets ought to require authentication. In different phrases, they need to confirm that customers are who they are saying they’re, and that solely approved events can entry the pockets’s contents. The most typical safeguards listed below are PIN codes or passphrases. As at all times, these must be sufficiently lengthy and sophisticated – utilizing many various kinds of characters – to be maximally efficient. Extra superior types of authentication can embody biometrics or public key encryption-based approvals, corresponding to cryptographic signatures from a number of different secured units.

  • Don’t roll your personal crypto (once more!)

Wallets ought to use well-established cryptography libraries. Perform a little research to make sure they’re audited and protected in order to keep away from key materials leakage or full lack of personal keys. Complicating the matter, even trusted libraries can have unsafe interfaces, as was not too long ago the case with these Ed25519 libraries. Watch out! 

A well-studied key utilization pitfall is the inadvertent reuse of sure cryptographic signature parameters. Some signature schemes might require a nonce that means, “quantity used as soon as,” an arbitrary quantity solely meant for use, properly, as soon as in a system. Elliptic Curve Digital Signature Algorithm (ECDSA) is one such signature scheme that does so. If a nonce is reused with ECDSA, it will probably result in key compromise. Varied different algorithms are usually not affected so, as standard, ensure well-established cryptographic libraries are getting used. (Sure cryptographic libraries guarantee distinctive nonces by hashing transaction information, which embody different distinctive information corresponding to account nonces.) However this assault vector has been exploited earlier than in high-profile hacks outdoors of web3, corresponding to this 2010 Sony PlayStation 3 hack.

One other finest follow is avoiding reuse of a key for greater than a single goal. Separate keys must be saved for encryption and signing, for instance. This follows the precept of “least privilege” in case of compromise, that means that entry to any asset, data, or operation must be restricted solely to the events or code that completely require it for the system to work. The precept of “least privilege” can, when correctly applied, drastically restrict the blast radius of a profitable assault. Completely different keys could have totally different necessities for backups and entry administration relying on their goal. Within the context of web3, it’s a finest follow to separate keys and seed phrases between property and wallets, so compromise of 1 account doesn’t have an effect on every other.


The custodial or non-custodial nature of key possession isn’t so black and white as typical considering would have one imagine. The scenario is sophisticated by the various shifting components concerned in key administration – from key technology to storage to utilization. Every bit of {hardware} or software program alongside the chain introduces dangers that expose even supposedly non-custodial pockets choices to custodial-type hazards. 

For the longer term, we anticipate extra growth work to be achieved to safe wallets towards assaults and to mitigate the dangers mentioned above. Areas of enchancment embody:

  • Shared safe open-source key administration and transaction signing libraries throughout cellular and desktop working methods
  • Shared open-source transaction approval frameworks

Particularly, we’d be notably excited to see growth for shared and open-source:

  • Key technology libraries to implement best-in-class safety throughout totally different storage backends (encrypted on disk, safe {hardware}, and many others.)
  • Key administration and transaction signing libraries for cellular and desktop working methods
  • Frameworks for transaction approval flows implementing robust issue verification corresponding to biometrics, PKI-based approvals, authorization restoration, and many others.

The above listing is non-exhaustive, but it surely’s place to begin. All that is to say, the scenario is extra sophisticated than the slogan “not your keys, not your crypto” signifies. Key possession is a difficult matter given the various interacting components and phases from technology and storage by way of utilization. 

Should you’re already engaged on a venture that addresses any of the above, or can be keen on doing so, please attain out! We look ahead to extra progress on these fronts.


Editor: Robert Hackett, @rhhackett


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