January 3rd will see Bitcoin turn 11 years old. To celebrate the innovative potential of the network on its birthday, one of its oldest proponents has created an annual event known as Proof of Keys.
The Proof of Keys event is an attempt to spread awareness about some of the more revolutionary qualities of the Bitcoin network. The idea is to educate new users to the network about the importance of taking responsibility for the storage of your own funds. It is also intended, if participation suffices, to test the solvency of the exchange platforms that people trust to store their cryptocurrency holdings.
The brains behind this birthday bank run of sorts is Trace Mayer (@TraceMayer). Mayer is the host of the Bitcoin Knowledge podcast and one of the cryptocurrency’s most consistent advocates.
The libertarian-minded Mayer believes that one of the most important qualities of Bitcoin is the fact that, unlike all other payment systems, the network doesn’t rely on any central entity for users to transact. However, this groundbreaking feature is lost when users store their cryptocurrency holdings in custodial wallets, like those provided by exchange platforms.
Not only does entrusting an exchange to store your Bitcoin and other cryptocurrency mean that you cannot use the networks in the truly permissionless way they were intended, but it also opens users up to various other security vulnerabilities. BeInCrypto has previously reported on numerous exchange hacks in which customers have lost money, as well as more peculiar incidents, like the sudden death of the Quadriga CX CEO. Gerard Cotten was apparently the only possessor of the private keys to the exchange’s cold wallets and, when he died, customers were left out of pocket.
Those taking part in the event will withdraw all their cryptocurrency holdings on exchange platforms before January 3rd and keep it in a wallet for which they themselves hold the private key. Any open-source, non-custodial wallet will work. The important thing is that the user transfers the funds to a wallet for which they hold the private key and that they remain there for the duration of the day. By doing so, those taking part will protect themselves from the attack vectors above and will be using cryptocurrency like Bitcoin in its intended way. Additionally, if enough people join in on the Proof of Keys event, they will also be testing the solvency of cryptocurrency exchange platforms themselves.
Unlike banks that typically run a fractional reserve, cryptocurrency exchanges usually claim to hold full reserves of their customers’ funds. Theoretically, if every single customer was to withdraw all their holdings at the same time, each request would be carried out with no issues.
The problem with this is the lack of regulation and auditing in the space. Just because exchanges claim to hold full reserves of assets such as Bitcoin, doesn’t mean that they do. Since Proof of Keys encourages all cryptocurrency asset holders to withdraw all their investments from exchanges at the same time, if enough people take part, it may indeed act as a test of the exchanges’ own solvency.