Security principles of bitcoin

Editor’s note: this is an excerpt from Chapter 10 of our recently released book Mastering Bitcoin, by Andreas Antonopoulos. You can read the full chapter here. Antonopoulos will be speaking at our upcoming event Bitcoin & the Blockchain, January 27, 2015, in San Francisco. Find out more about the event and reserve your spot here.

Securing bitcoin is challenging because bitcoin is not an abstract reference to value, like a balance in a bank account. Bitcoin is very much like digital cash or gold. You’ve probably heard the expression “Possession is nine tenths of the law.” Well, in bitcoin, possession is ten tenths of the law. Possession of the keys to unlock the bitcoin, is equivalent to possession of cash or a chunk of precious metal. You can lose it, misplace it, have it stolen, or accidentally give the wrong amount to someone. In every one of those cases, end users would have no recourse, just as if they dropped cash on a public sidewalk.

However, bitcoin has capabilities that cash, gold, and bank accounts do not. A bitcoin wallet, containing your keys, can be backed up like any file. It can be stored in multiple copies, even printed on paper for hardcopy backup. You can’t “backup” cash, gold, or bank accounts. Bitcoin is different enough from anything that has come before that we need to think about bitcoin security in a novel way too.

Security principles

The core principle in bitcoin is decentralization and it has important implications for security. A centralized model, such as a traditional bank or payment network, depends on access control and vetting to keep bad actors out of the system. By comparison, a decentralized system like bitcoin pushes the responsibility and control to the end users. Because security of the network is based on Proof-Of-Work, not access control, the network can be open and no encryption is required for bitcoin traffic.

On a traditional payment network, such a credit card system, the “payment” is really open-ended because it contains the user’s private identifier (the credit card number). After the initial charge, anyone with access to the identifier can “pull” funds and charge the owner again and again. Thus, the payment network has to be secured end-to-end with encryption and must ensure that no eavesdroppers or intermediaries can compromise the payment traffic, in transit or when it is stored (at rest). If a bad actor gains access to the system, he can compromise current transactions and payment tokens that can be used to create new transactions. Worse, when customer data is compromised, the customers are exposed to identity theft and must take action to prevent fraudulent use of the compromised accounts.

Bitcoin is dramatically different. A bitcoin transaction authorizes only a specific value to a specific recipient and cannot be forged or modified. It does not reveal any private information, such as the identities of the parties, and cannot be used to authorize additional payments. Therefore, a bitcoin payment network does not need to be encrypted or protected from eavesdropping. In fact, you can broadcast bitcoin transactions over an open public channel, such as unsecured WiFi or Bluetooth, with no loss of security.

Bitcoin’s decentralized security model puts a lot of power in the hands of the end users. With that power comes responsibility for maintaining the secrecy of the keys. For most users that is not easy to do, especially on general-purpose computing devices, such as Internet-connected smartphones or laptops. Whereas bitcoin’s decentralized model prevents the type of mass compromise seen with credit cards, many end users are not able to adequately secure their keys and get hacked one by one.

Developing bitcoin systems securely

The most important principle for bitcoin developers is de-centralization. Most developers will be familiar with centralized security models and may be tempted to apply these models to their bitcoin applications, with disastrous results.

Bitcoin’s security relies on decentralized control over keys and on independent transaction validation by miners. If you want to leverage bitcoin’s security, you need to ensure that you remain within the bitcoin security model. In simple terms: don’t take control of keys away from users and don’t take transactions off the blockchain.

For example, many early bitcoin exchanges concentrated all user funds in a single “hot” wallet with keys stored on a single server. Such a design removes control from users and centralizes control over keys to a single system. Many such systems have been hacked, with disastrous consequences for their customers.

Another common mistake is to take transactions “off blockchain” in a misguided effort to reduce transaction fees or accelerate transaction processing. An “off blockchain” system will record transactions on an internal, centralized ledger and only occasionally synchronize them to the bitcoin blockchain. This practice, again, substitutes de-centralized bitcoin security with a proprietary and centralized approach. When transactions are off blockchain, improperly secured centralized ledgers can be falsified, diverting funds and depleting reserves, unnoticed.

Unless you are prepared to invest heavily in operational security, multiple layers of access control, and audits (as the traditional banks do) you should think very carefully before taking funds outside of bitcoin’s decentralized security context. Even if you have the funds and discipline to implement a robust security model, such a design merely replicates the fragile model of traditional financial networks, plagued by identity theft, corruption, and embezzlement. To take advantage of bitcoin’s unique decentralized security model, you have to avoid the temptation of centralized architectures that may feel familiar but ultimately subvert bitcoin’s security.