Testing Your Bitcoin Custody Setup – Bitcoin Magazine
This is an opinion editorial by Will Schoellkopf, host of “It’s So Early!” Bitcoin podcast.
We often hear, “Not your keys, not your coins,” but have you done the “big scary?”
A lot of emphasis has been placed on getting your satoshis off the exchanges, and rightfully so! Mt. Gox exchange hack has led to lost coins, but ‘recent market conditions’ has also led to the halt of withdrawals from large institutions with many assets under management such as Binance and Celsius. These are not lostbut denied access presents a new vulnerability for supreme individuals to consider: If your child resets your hardware wallet, or your dog eats your seed phrase, can you get your money back?
For all the emphasis placed on security, not enough is placed on recovery. Buy peace of mind today! Test recovery of your keys so that you retain the ability to use your stake. Do it now; before you panic from a security compromise.
The “big scary” loses access to your hardware wallet, so you really need your seed phrase to recover. Only when you’ve proven that you’ve got the keys to yourself are you truly a supreme individual. Fortune does not favor the bold, it favors the prepared! Follow the steps below to prepare for the worst so you can know your safety and recovery is in your best interest. Of course, complete the following with smaller amounts of effort, so you don’t risk losing your entire savings. We are not on a rocky boat while we try this!
Single Sig Recovery Check
- Perform recovery phrase check on your hardware wallet with the seed phrase in hand.
- “The Big Bad”: Enter your PIN incorrectly three or sixteen times on purpose to reset your hardware wallet.
- Disconnect and then connect the hardware wallet to the wallet software to confirm that it recognizes it as a “splitting new” device with zero balance.
- Re-enter your seed phrase into your hardware wallet and verify that the wallet software is now verifying the same satoshi balance to your UTXOs.
*Note: It is recommended not to use the recovered wallet as your main wallet after confirming that this process works.
Collaborative Custody (2-of-3) Multi-signature
- Key A is under your control via hardware wallet A (and you back up the wallet’s configuration file).
- Key B is under your control via hardware wallet B (and you back up the wallet’s configuration file).
- Key C is under the control of your cooperating custodian (eg: Casa, Unchained Capital).
- Key S is under your control via hardware wallet S. It is a single signature phrase.
*With multisig, you not only need the keys to the treasure chest, but also the map of where to find it! With simple sig, as long as you have the only seed phrase, you can derive xPub again. For multisig, you don’t need all three keys, but you do need the wallet configuration file to derive all three xPubs again! Note that these platforms may also offer (3-of-5) multisig.
Step 1: Exercise all three nominal cases with a collaborative custody platform
- Send some stakes from hardware wallet S to your multisig address.
- Try not to use these bets with Wallet A only, Wallet B only and Wallet C only.
- Use hardware wallet A+B to send to single signature wallet S.
- Use hardware wallet A + custodian key C to send to single signature wallet S.
- Use B+C to send to S.
- You should feel good. Now send more rate back to your multisig address, but not too much!
For safe keeping, you kept your wallet for cold storage in that sweaty gym bag that you never use and no thief in their right mind would ever want to rummage through! And you buried the paper copy of your seed phrase in the ground so it would be safe for anyone looking for it and easily destroyed if you were in a pinch. Unfortunately, The Bitcoin Dog had other plans! She loves the smell of your sweaty socks, and loves digging up a freshly dug hole in the garden. Fortunately, you’re not in any physical danger, so you can calmly restore your multisig vault.
Step 2: The “big scary” – lose a key, but not your cooperative manager
- Reset hardware wallet A and shred seed phrase A (similar destruction as above).
- Report a “lost key” with your partner manager (eg Casa or Unchained Capital).
- Generate a new seed phrase for key A and load into hardware wallet A.
- The collaboration partner replaces/creates a new 2-of-3 multisig with new wallet A and original B.
- With your hardware wallet B with the original seed B, sign a transaction with your partner to send seed from the old vault to the new vault.
Note: In this scenario, it is not an emergency. If there was an emergency, you would instead send your Bitcoin directly to your single-sig address controlled by hardware wallet S. For example, if seed phrase A was stolen from a trusted family member’s home, and the attacker now comes to your home to steal the second seed set, this is an emergency. Break glass. Send your vault balance to your hardware wallet with a cooperating custodian before the attacker tries to impersonate you as a custodian or tries to steal the second seed phrase from you.
- With new vault A+B, send some stakes to S to prove that you have control over the new vault.
- You feel good, now send the rest from the old vault to the new vault.
- Use A+C to send to S.
- Use B+C to send to S.
- Only send test amount to S. No need to send it back to your multisig vault!
Stage 3: Final Boss – Collaborator Compromised
- Download and install Caravan, Electrum or Sparrow.
- Upload the wallet configuration file to restore the multisig vault in a new location.
- Partial Sign Bitcoin Transaction (PSBT) with hardware wallet A.
- PSBT with hardware wallet B.
- Send test batch to hardware wallet S, and then everything.
You did it! The apocalypse happened. Your partner was compromised and yet you were still able to recover your bitcoin yourself and take responsibility for your satoshis. After this nightmare is over, maybe you can reflect on why you even participated in shared custody in the first place?
- “Comforting” to trust a single key manager.
- “Comfort” to trust a manager with the wallet configuration file and three xPubs.
- “Comforting” to trust a custodian to help you with inheritance and multisig key setup with your loved ones when you pass.
- “Easier” to replace a lost key and send your stake to a new vault.
Now that you’ve implemented multisig yourself, do you want to pursue a new collaborator, or go back to step 1? There is no right answer. Everyone’s security needs are unique!
This is a guest post by Will Schoellkopf. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc. or Bitcoin Magazine.
