Published Aug 27, 2020
By Hartej Sawhney, CMBDO at Qredo
In an interview with Miko Matsumura on his podcast — MikoBits, Qredo’s Chief Product Officer Brian Spector discussed the problem of custody institutional investors face. The two dove deep into both the technology that underpins secure custody and the concrete products that it can provide.
Miko Matsumura, the host of the MikoBits YouTube channel, is a general partner with Gumi Ventures, a U.S.-based $30 million venture capital fund focused on early-stage blockchain startups.
Brian Spector is the chief product and strategy officer at Qredo. Spector co-founded security infrastructure company Apache Milagro and computer and network security company MIRACL (formerly CertiVox). His previous experience includes working at RSA, nChipher, and McAfee.
* * * * *
Envisioned as a way to remove third parties from the process of transacting, blockchain has brought about a revolution in the world of finance. Without the need for a bank or other trusted intermediaries to verify transactions, cryptocurrencies have introduced a whole new meaning to the word freedom.
Despite blockchain technology being touted as a trustless system, the crypto industry still relies on third-parties. Cryptocurrency exchanges and wallets are often targets for hackers, who are estimated to have stolen $1.7 billion in cryptocurrency in 2018 alone.
On the other hand, not relying on third-party systems to keep cryptocurrencies secure has resulted in around 3 million bitcoin being lost due to human error.
Legacy banks and hedge funds want to steer clear from systems where custody might as well always be discussed with a big question mark next to it.
While the problem of custody is not one that can be solved overnight, a combination of smart engineering and cryptography is slowly changing the model from the ground up.
To bring more institutional investors into the crypto industry, Qredo had to create a system that was not only infallibly secure but also well-regulated and auditable.
Applying Multi-Party Computation to Cryptocurrency Wallets
One way Qredo went about solving this problem is with multi-party computation. A subtopic of traditional cryptography, multi-party computation enables parties to jointly compute a function over their inputs while keeping those inputs private. Put simply—the concept allows a group of computers to talk to each other and perform functions without revealing sensitive information to each other.
When it comes to blockchains, that sensitive information is, of course, a private key that signs a transaction. The interesting proposition behind multi-party computation presented itself as a way to solve the custody problem.
The role of a custodian in the crypto industry is an intrinsically simple one—in order to engage the services of a custodian, users must initiate a transaction on a blockchain and send off all of their funds. This essentially means that cryptocurrency custodians have more in common with a traditional bank than a custodial one.
This makes crypto custodians a hard sell to institutional investors, as they can’t be audited and present a significant security risk.
When designing Qredo, the goal was to create a custodial platform that steals the best bits from blockchain technology and uses them to drive a multi-party computation network. As a multi-party computation network essentially creates a private key for every transaction without creating the private key, it could be used to facilitate a safe custodial platform.
But, multi-party computation in itself isn’t enough to create a fully secure and functional network. To create this, Qredo explored using another blockchain to program the nodes in a multi-party computation network.
As these nodes are, in and of themselves, decentralized, they can be driven by the actions of what takes place on a blockchain. Taking away the uncertainty of who controls the nodes in a multi-party computation network by making them programmable to what’s going on a blockchain makes the underlying blockchain incredibly secure.
Applying incentives and rewards to parties running the nodes further increases the security of the blockchain.
Solving the binary problem of ownership
While not a very complex mechanism, multi-party computation has managed to solve the binary problem of ownership on a blockchain.
The concept of crypto ownership, from the perspective of a blockchain, is very simple—whoever has the private keys is the owner of the funds. By removing the need for private keys altogether, Qredo was able to increase both the security and the functionality of its network.
A wallet built on such a consensus-driven multi-party computation network allows users to divide individual UTXOs into multiple different transactions. No key actually exists, so it’s possible to divide the unspent funds in a custodial wallet.
Aside from enabling secure custody, a network like this can also act as a secondary highway where assets can move and settle quickly. A fast-finality blockchain that’s not dependent on proof-of-work or any other complex protocol can easily turn into a mechanism for solving the problem of fast payments and delivery of digital assets.
Introducing a sophisticated concept of ownership to blockchain technology opens up a whole new world of possibilities—the most important one being decentralized finance (DeFi).
One of the biggest problems the DeFi industry currently faces is securing access to the smart contracts that control huge amounts of funds locked in the protocols. A network such as Qredo enables the creation of a secondary set of rules and consensus drivers that add a super-layer of administrative functions to smart contracts. These functions are programmed to kick into gear when certain things happen on the blockchain—causing certain actions to result in specific consequences.
This can be something as simple as terminating the contract once a vulnerability is detected, or something as complex as settling thousands of transactions at the same time.
Institutions will never risk putting their funds into the DeFi market if there’s only a single layer of code that protects the admin key to a smart contract holding hundreds of millions of dollars.
However, having a DeFi protocol controlled by a multi-party computation network run by a set of decentralized, programmable nodes drastically reduces that risk and makes such a protocol attractive to institutional investors.
These investors can also benefit from a rather novel phenomenon in the crypto industry—trade credit.
Just like trading stocks on traditional exchanges, trading cryptocurrencies requires users to send their assets to an exchange, which then facilitates the trade for them.
A system like Qredo bypasses this by enabling a counterparty in a trade to view the funds that are in a user’s wallet without being able to access it. This means that, for example, a cryptocurrency exchange can see all of the assets in the wallet of a hedge fund and provide it with trade credit to facilitate the purchase of crypto assets on its platform.
Everything on Qredo is expressed as an ownership right. And with a weapon like that, it’s only a matter of time we begin seeing the rise of “institutional DeFi.”