Solving Blockchain's Billion Dollar Problem

by Brian Spector, Chief Product and Strategy Officer at Qredo

Published Nov 12, 2020 12:26:56 PM

Having spent two decades leading a global company at the forefront of enterprise cryptography and cybersecurity, I was itching for something new.

Then when I became aware of Bitcoin in 2013, I didn’t appreciate it at first. But over the next several months I was converted.

Though I didn’t want to leave the cryptography world I had known since the earliest days of my professional career, I knew that my passion was now in the burgeoning crypto space; dealing in blockchain, which was overflowing with fresh opportunities for innovation.

The problem of private keys

While Satoshi had taken the trust out of transactions with Bitcoin, I noticed that private key management methods were reintroducing trust to the cryptocurrency market.

Cold storage and hot wallets create a centralized vulnerability in a decentralized system, with significant knock-on effects. Struggles to secure private keys in this way have led to billion dollar losses, and siloed liquidity — with assets locked away in wallets where they cannot be deployed in the digital asset ecosystem.

In this fragmented market, fresh funds are piped into separate exchanges, which act as combined-broker custodians and mitigate shallow liquidity by pooling funds in omnibus wallets that become honeypots for hackers.

At the same time, the explosion of new cryptocurrencies creates even more silos, leaving liquidity split between hundreds of trading venues and thousands of different blockchains.

Making matters worse, the institutions that could dramatically deepen liquidity are left on the sidelines, unable to justify the enormous counterparty risk posed by the capital requirements of unregulated exchanges: Imagine if the New York Stock Exchange asked you to send in your stock certificates before you could trade. Crazy right?

Yet without this deep liquidity, the crypto market remains volatile, stuck in the mood swings of perpetual adolescence, unable to mature and support the dream of a stable blockchain-based economy.

So as crypto mania took hold in 2017, I took my chances and left my previous startup, bringing the same group of expert cryptographers on board to solve blockchain’s billion dollar problem: private key management.

Following Satoshi's lead

We realized that centralization was at the heart of the problems of locked liquidity and poor security; the application of centralized paradigms of asset management to decentralized assets.

To overcome this, we decided to extend Satoshi's Bitcoin ethos to private key management, and completely remove trusted third parties.

Multi-party computation (MPC), which I believe is the biggest cryptographic breakthrough since the invention of public-key cryptography nearly fifty years ago, made this possible by letting participating computers generate a digital signature without ever having to produce or recreate a whole key at any time.

This was a step in the right direction, but even MPC implementations can still have counterparty risk.

To reach the promised land, we needed to fully decentralize private key management.

#thenetworkisthevault

The idea we hit on was straightforward: leverage MPC across a blockchain network to create decentralized custody. A distributed ledger would be used to record the ownership of a crypto asset, and a consensus-driven implementation of MPC used to securely sign transactions.

Literally, the network becomes the vault.

Over the last two years we have brought this vision to life, and created trustless private key management by following the principles of decentralization, right down to building our own hardware. MPC nodes are backed by custom HSMs distributed in Tier 4 data centers around the world, which will eventually be governed through a DAO by liquidity providers on the network.

By replacing centralized private keys with a consensus-driven MPC protocol, we enable the transfer of portable ownership rights across chains on a Layer 2 network, without counterparty risk.

This creates the ideal trading conditions for institutions, which can delegate capital to multiple exchanges from a single pool of collateral held in their Qredo wallet, map asset controls and custodianship to organizational requirements, and record all activity on-chain in immutable regulatory audit trails for easy compliance.

Mainnet v1 is live

The Qredo Network is live, built, delivered and pen tested, and the network effect is already taking hold. 33 asset managers and hedge funds have joined, along with 5 top-tier digital asset exchanges, 2 custodians, and 2 EMS/OMS/PMS vendors including our partner HedgeGuard.

We are standing by ready to welcome new members. Visit https://www.qredo.com/join to join the network .

- Brian Spector, Qredo co-founder and CPO