The recent meltdowns in the crypto verse have triggered a flight to non-custodial wallets, which give you sole control of your private keys, and in turn your cryptocurrency.
Conventional non-custodial wallets include software ones like MetaMask, as well as hardware wallets like Ledger and Trezor. All of these employ a seed phrase that’s used to derive private keys, their corresponding public keys, and on-chain addresses.
While exchanges and the crypto sector as a whole have taken steps to repeatedly educate users about the importance of keeping seed phrases and keys secure, incidents of users losing their assets when their private keys are lost or stolen, are far too common.
Despite their conveniences, the fact remains that the single point of failure is the biggest drawback of conventional non-custodial wallets. Two solutions that have helped eradicate this shortcoming are multi-party computation (MPC) wallets and smart contract wallets.
Custodians seeking to protect their wallets after the Mt.Gox exchange hack in 2014 decided to bolt on an additional layer of protection in the form of a multi-signature (multi-sig) scheme.
Multisig helped spread signing responsibilities in order to eradicate the single point of failure or a single person from being able to compromise assets held in a wallet. As its name suggests, multi-sig employs multiple individual private keys for each wallet, with a set number of signatures needed to authorize transactions.
However, as custodians soon realized, this strategy wasn’t scalable. This is where smart solutions, such as MPC wallets, stepped in.
MPC wallets employ a process known as Distributed Key Generation (DKG) where users create and distribute shares of a private key such that no one single person or machine controls the private key entirely. To generate a public key users need to combine their respective shares, and they can do so without exposing shares between the parties.
Furthermore, the key shares are combined and the signature is generated off-chain. This means a transaction generated from an MPC wallet is indistinguishable from that of a conventional private key wallet. There is also no seed phrase.
MPC wallets like Fireblocks have become a standard fare for institutional-grade custodial solutions. Similarly, ZenGo is one of the most popular MPC wallets for individual crypto users.
Non-custodial wallets like MPC wallets and smart contract wallets are an important cog in the wheel of a truly decentralized economy, and their use will help shake the stranglehold of centralized entities in the crypto sphere.