The introduction of blockchain technology brought a novel way to conduct financial transactions. Absolutely trustless, Bitcoin and other decentralized digital assets removed the need for users to rely on trusted third parties to send and receive money. However, that is limited to peer-to-peer transactions.
Centralized institutions, like the ones in traditional finance, mushroomed to offer utility and convenience that otherwise don’t exist with self-custody and peer-to-peer transacting. Today, the Web3 industry comprises several centralized entities operating alongside decentralized implementations to provide users with a burgeoning ecosystem of finance and tokenized use cases. However, that poses critical challenges.
The Woes of the Web3 Ecosystem
Trusting institutions to hold and transact user value can lead to bad behavior propelled by the selfish motives of those operating said institutions. Due to that, many Web3 users – institutional and retail – have their assets stolen. Look no further than the FTX fiasco to know how things can go very wrong.
The story does not change with any other centralized enterprise that looted its customers. Money-hungry founders adopt corrupt governance practices to part clients from their assets. The growing adoption of the asset type creates a massive need for honest governance practices.
Decentralized Web3 protocols also face their own threats, with hackers looking to exploit the large amounts of liquidity they manage. Many protocols have fallen victim to cybercriminals attacking their storages and transactions to walk away with tremendous value. Regardless, the issues faced by centralized and decentralized Web3 platforms are beatable.
And what is better than using technology to combat the issues faced by technological advancements that are blockchain and digital assets? Multi-Party Computation (MPC) technology has become the answer to governance-related issues in the centralized and decentralized parts of the Web3 ecosystem.
As MPC-based wallets get integrated into the asset storage infrastructures of centralized and decentralized platforms, the ecosystem is moving towards secure, efficient, and simplified institutional governance.
The Governance Dilemma in Web3
The governance problems faced by digital asset institutions are nothing new. In fact, the issue of institutions and enterprises behaving poorly with user assets has remained a recurring theme throughout the existence of digital assets. Not using appropriate storage infrastructure, misappropriating funds for self-serving gains, and scamming clients outright have all been repetitive occurrences in the ecosystem.
Poor governance in relation to asset storage and access has been why enterprises lose client assets to hackers or decide to steal the value themselves. Web3 protocols operating on decentralized models face governance-related issues as well. The wallets they use for storing and transacting assets and interacting with their user bases are vulnerable to internal and external threats.
Like the large amounts of assets stored by institutions, protocol-related wallets attract bad actors in droves. The holes in asset transactions and storage security can allow hackers to have a field day and steal in the millions. If not obvious, such occurrences are related to how the protocols and institutions manage the assets.
Relying on traditional single-signature wallets and even multi-signature (multisig) wallets is neither the safest nor the most efficient way to handle them. Single-signature wallets pose the issue of a single point of failure. Essentially, hackers can access the funds stored in a single-signature wallet if they retrieve their private keys.
Despite using cold wallets that store private keys offline securely, over the more vulnerable online hot wallets, the threats posed by social engineering and phishing constantly loom. Bad actors can take advantage of the redundancies present with using cold wallets in the enterprise setting to penetrate through their high-level security.
Then, there is always the issue of rogue players within the enterprises, taking advantage of the single point of failure possessed by single-signature wallets. How hard is it for an employee or anyone from the top-level management to misappropriate funds from their company’s wallets? All it takes is access to wallet private keys and the motivation to steal.
While the most logical approach to evading such issues is using multisig wallets, they are not without their drawbacks. Multisig wallets require multiple keys in an m-of-n configuration to sign a transaction. That means multiple signatures get broadcasted on-chain, and when the required number of signatures are broadcasted, transactions get initiated from the multisig setup. However, that poses security vulnerabilities.
Hackers who have narrowed down on protocol- or institution-related wallets can figure out the wallets signing the transaction and the number of keys required to sign any transaction. Over a long enough period, they can theoretically gain access to the needed number of wallet private keys to launch successful attacks. Similarly, corrupt organizational members can retrieve the private key information of their peers to take control of funds and manipulate transactions.
Also, several key signing transactions increase transaction fees at the blockchain level. Furthermore, multisig wallets are not interoperable and often just support one chain. So, interacting with assets from different blockchains will require enterprises and projects to utilize multiple multisig setups. Keeping track of all those wallets and spending heavily on the numerous transactional requirements are not feasible.
Single- and multi-signature wallets may be ideal for the average retail investor or user. But institutions need wallet solutions that are more secure and efficient without one canceling the other, which is usually a dilemma with anything blockchain-related.
Introducing MPC Technology: A Paradigm Shift in Governance
MPC technology is nothing new – it has been a staple of cryptography since the ‘80s. With developments in MPC technology and blockchain’s introduction, MPC has integrated into the functioning of digital asset wallets.
MPC technology is used to create separate shards of data. These shards, when combined, can compute a specific result. During the computation, no information about any shard is revealed. MPC algorithms are designed to hide the sharded data of users from one another while revealing just the results of computations.
Transposing this capability to digital asset wallet functionalities generates possibilities where multiple individuals, again m-of-n, can approve transactions. It might sound like how multisig wallets work, but several differences exist. The major one is MPC wallets not consisting of several private keys like multisig wallets. Instead, they work with one key divided into multiple shards.
When all the key shards, or the needed number of shards, initiate a transaction, the algorithm computes the data from the shards to generate a transaction signature. This signature then takes the transaction on-chain for verification. The computation itself is executed off-chain. Thus, hackers cannot learn about the key shards responsible for initiating transactions from MPC wallets by looking at blockchain explorers.
This security comes on top of that offered by the multiple key shards needed to initiate transactions. MPC wallets are, thus, highly resilient against cyberattacks. Several MPC wallet providers now also implement key refresh features, which allow MPC wallet users to generate new key shards after every transaction or set intervals.
Therefore, it is nearly impossible for cybercriminals to gather information about the needed shards over a long period to make unauthorized transactions. Institutions and protocols relying on MPC wallets for asset storage can avoid cyberattacks better than with other wallet types.
Attacks launched by internal threats are obviously also averted. MPC wallets prevent the possibility of initiating corrupt transactions, reigning in the ideal governance measures through distributed access to digital assets in the most secure way.
MPC wallets also offer high levels of transparency to enterprises. Those in charge of enterprise storage have access to wallet transaction history, including information about the value transferred and members approving or declining the transfers. Such improvements push MPC wallets above multisig ones despite both wallet types allowing for distributed digital asset transactions.
MPC wallets also offer increased efficiency compared to multisig wallets and cold wallets. They transmit a single signature on-chain, making transaction confirmation much faster than confirmation on multisig wallets. Also, their enhanced security allows institution personnel to store the key shards safely online.
Because of that, institutions can transact digital assets much faster than cold wallets while achieving similar levels of security. While cold wallets are still the industry standard for concentrated asset storage and can also come in MPC configurations, institutions can utilize hot wallets in MPC configurations for enhanced security while maintaining the efficiency needed to provide instant liquidity for customers.
Another advantage of MPC wallets is that they are highly scalable. Say enterprises want to increase or decrease the number of personnel possessing access to their MPC wallets. They can generate or delete additional key shards with ease. Furthermore, MPC wallets are interoperable with most blockchains.
So, enterprises and protocols can store several crypto assets in these wallets without maintaining dedicated wallets for each blockchain. The benefits do not stop there. MPC wallets can easily be plugged into platforms, removing the need to rebuild parts of the platforms to accommodate MPC storage.
With a long list of advantages, MPC wallets are the logical choice over other wallets for platforms managing multiple wallets in their infrastructures and committing high-value transactions. Their efficiency and scalability are unmatched.
MPC Technology in Action: Practical Applications for Institutional Governance
MPC wallet providers are making a cutting-edge difference to the dilemma of institutional governance in Web3. Let’s look at some wallet providers and custodians providing the best MPC solutions.
Fireblocks
Fireblocks is an industry-leading custodian known to address all kinds of digital asset storage needs. Their non-custodial MPC wallet solution is one of the easiest to integrate into applications and platforms. It operates with the natively developed MPC-CMP algorithm – a leading innovation in MPC-based asset storage. The algorithm is open-source and can be audited before implementation.
Fireblock’s MPC offerings are compatible with 50+ blockchains and hundreds, if not thousands, of tokens. Signing transactions occur with some of the fastest speeds while using Fireblock’s MPC wallets. These capabilities have let the custodian process transactions collectively, moving over $4 trillion.
Liminal Custody
Liminal is a fairly new entrant in the digital asset custody segment but is witnessing rapid adoption. Over fifty crypto enterprises use its services, including banking-grade MPC storage solutions. It also boasts more than $550 million worth of assets under secure storage and has processed transactions collectively worth over $6000 million through its custody solutions. Liminal has achieved such feats by making the most difference in the MPC wallet segment with its increased security protocols.
That involves enterprises setting up measures like transaction limits and whitelisting receiver wallet addresses. These processes occur through ceremonies where enterprise personnel accept or decline wallets during the whitelisting process and set limits on transaction values. Through truly distributed governance, Liminal’s MPC wallets transform institutional governance and set the benchmark for Web3.
Blockdaemon
Blockdaemon – one of the best-known MPC wallet providers, has offered such solutions since 2018. Interestingly, the company is the first to issue MPC-based custody solutions. Not surprisingly, its MPC wallet solutions are some of the most widely used today. Several crypto enterprises and traditional finance institutions rely on its digital asset storage offerings.
The wallet provider’s solutions come fortified by its “Advanced MPC” technology, a self-developed MPC module securing wallets on multiple levels. Like the other entrants here, Blockdaemon’s wallets are secured through distributed signing capabilities by dividing private keys into shards.
However, what makes them highly interesting is the use of MPC technology for transaction-related policies. Blockdaemon uses cryptography to store policy-related information with key shards. Policies are, thus, merged with the key shards, making transaction manipulation highly unlikely. Therefore, transactions are secured by MPC technology at two layers, bringing increased security and good governance.
These industry innovators offer solutions embedded with MPC technology to take institutional, enterprise, and protocol custody-related governance to the next level. Despite the more touted benefits of distributed and secure access and storage of assets, MPC wallets bring other benefits like accountability and transparency to governance trails. So, whether it is an enterprise or a web3 protocol, permitted stakeholders always know how funds are accessed and utilized.
The Future of Institutional Governance with MPC Technology
There is no doubt that MPC technology is spearheading the much-needed transformation in institutional governance that Web3 requires. By merging security, efficiency, and distributed access, MPC wallets avert major issues with the concentrated asset storage of enterprises and protocols.
The entire ecosystem can rest easy now that their assets are stored much safer against cybercriminals and internal exploits. With that level of safety, more institutional investors will begin interacting with digital assets. The enormous value they pump into the ecosystem will remain secured by the enterprises of their choice.
Of course, the safety will also extend to Web3 protocols. MPC wallets handling their massive liquidity will come set with predetermined parameters and distributed signing to ensure only correct transactions occur. DAOs will also move to implement MPC wallets if they are not already.
All aspects of the Web3 ecosystem will undoubtedly benefit from MPC technology. With calls for increased security, transparency, and efficient governance practices from user communities and regulators, MPC wallets hold the potential to fill all existing gaps.
Conclusion
Web3 platforms have always had evident governance and security problems. They mainly stem from how the platforms store digital assets. MPC technology’s integration in asset storage infrastructure addresses the related governance issues and improves security and efficiency in handling large amounts of liquidity.
Thus, it is important to understand how MPC technology plays a role in making the ecosystem better. Web3 enterprises must adapt to the changing times to meet the desires of users and lawmakers, and integrating MPC wallets into asset storage infrastructures will help them do that.