Proof Of Keys Less Than A Month Away; HODLERs Will Collectively Stress Test The Crypto Space By Withdrawing Bitcoin (BTC) From Trusted Third Parties

December 12, 2019 / by Zachary Mashiach

Jan. 3, 2020 is the 11th anniversary of the Bitcoin (BTC) genesis block, and in general, a day of increased enthusiasm across the crypto space. There is now another event that happens on Jan. 3 of every year called Proof of Keys, where HODLERs collectively stress test the crypto space’s trusted third parties by withdrawing all of their Bitcoins (BTC) at once. Here, we will deep dive Proof of Keys, discussing its history, how it works, and its benefits.

Proof of Keys was started by crypto enthusiast Trace Mayer with this Tweet on Dec. 9, 2018. The first Proof of Keys happened shortly after that on Jan. 3, 2019 and ended up being quite popular, especially across crypto Twitter.

The idea behind Proof of Keys is that Bitcoin (BTC) users do not truly control their own funds unless they are the only ones who hold the private keys. Indeed, most cryptocurrency exchanges, even reputable and mainstream ones like Coinbase, control the private keys for a user’s Bitcoin (BTC). Most other crypto and blockchain platforms work similarly, such as cloud mining, investment websites, and decentralized finance (DeFi) platforms, where users deposit Bitcoin (BTC) or other cryptocurrencies, and that user no longer has access to the private keys for their coins.

There have been numerous cases of cryptocurrency exchanges losing customers’ funds. Typically, the reasons for this are either a hacker draining the crypto exchange, a government crackdown, or internal fraud. Regardless of the reason, customers generally lose their funds forever. This same catastrophic scenario happens to all other crypto and blockchain platforms which store cryptocurrency in a centralized way. One of the primary purposes of cryptocurrency is decentralization, and the repeated failures and losses due to storing crypto in a centralized manner defeat this purpose.

Proof of Keys Stress Tests Exchanges and Platforms Across the Crypto Space

The primary purpose of Proof of Keys is to temporarily stress test crypto exchanges and platforms by withdrawing as much crypto as possible in a short amount of time. If a user receives the coins into their own wallet without any hassles, they will then know that the trusted third party is solvent. Likewise, if the user does not receive their coins, or there is a major hassle to get the coins, then the trusted third party may be insolvent or running on a fractional reserve.

This is especially true since Proof of Keys was popular last year, so a lot of people were withdrawing their coins from trusted third parties all at once. Indeed, HitBTC has been accused of freezing accounts just before Proof of Keys. Coinbase and Bitfinex also had some temporary hiccups during Proof of Keys. That being said, there is no evidence to confirm that the temporary problems on these exchanges were caused by Proof of Keys, and all of these exchanges remain highly active to this day. Aside from exchanges, gift card website temporarily halted withdrawals without any explanation during Proof of Keys.

Proof of Keys has the potential to be even more widespread this year, since the Proof of Keys movement has had a whole year to mature. Also, the last Proof of Keys occurred near the bear market low, and now Bitcoin’s (BTC) price is much higher, and the crypto space is generally more optimistic and active.

If Proof of Keys eventually becomes widespread enough, whether it’s this year or sometime in the future, perhaps it could act as a serious stress test for the entire crypto space, and become a way to weed out insolvent companies and platforms on an annual basis. This would make the crypto space much healthier, as opposed to letting insolvent companies run for years, which only maximizes damage once they finally go under.

Proof of Keys Is a Practice Run for Storing Crypto the Right Way and Running a Full Node

Aside from the stress test aspect, another purpose of Proof of Keys is to teach HODLERs how to properly store Bitcoin (BTC) and other cryptocurrencies, with the event being like a practice run.

The most highly recommended wallet is Bitcoin Core, which can run a full node and requires no connection to third party servers. This makes Bitcoin Core completely self-sufficient, and private keys in Bitcoin Core are only accessible by the user. Also, users who run Bitcoin Core are among the less than 10,000 full nodes in the world which help keep the Bitcoin (BTC) network running. The only caveat is that it takes weeks or even months to synchronize Bitcoin Core since the entire blockchain must be downloaded. Therefore, if someone wants to run Bitcoin Core for the first time during Proof of Keys, they should start the download and synchronization process ASAP.

In the original Proof of Keys tweet at the top of this article, the event’s founder discusses how participants will perform their own network consensus via running Bitcoin (BTC) full nodes in order to declare their monetary sovereignty.

Therefore, running Bitcoin Core or another wallet that has full node capabilities, such as Armory, Bitcoin Knots, and mSigna, is the purest way of participating in Proof of Keys.

Even if a user does not have time to synchronize a full node, using a lite-wallet like the Blockchain wallet for Proof of Keys, or for storage in general, is safer than keeping coins on an exchange or another third party platform. At least with the Blockchain wallet, the user is the only one with access to the private keys.

The general rule of thumb for users to maintain control over their cryptocurrency is that coins should only be put into an exchange during the time it takes to trade and then immediately withdrawn when the trade is complete. Also, users should heavily research the reputation of an exchange or other third party platform before sending a deposit. Even when using one of the most reputable exchanges, like Coinbase, a smart HODLER would hold coins in their own wallet 99% of the time, with the other 1% being the time it takes to trade on Coinbase.

We think Proof of Keys is a highly beneficial addition to the anniversary of Bitcoin (BTC) since it has the potential to weed out insolvent crypto companies and platforms via a collective stress test. It simultaneously teaches users how to properly store their crypto in a way where only they have access to the private keys in addition to teaching users how to run a full node. Essentially, Proof of Keys helps crypto users come back to the roots of the crypto space, which are decentralization and cryptographic security. Considering all of this, it would not be surprising if the second annual Proof of Keys event in less than a month is the biggest one ever.