[bitcoin-dev] CoinVault - Secure Cryptocurrency Exchange - Technology Overview

[Praveen Baratam <praveen.baratam@gmail.com>]

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Hello Devs,

I am Praveen and I am the inventor of CoinVault, a new second layer
protocol and technology that makes Bitcoin and other similar altcoins
`Unstealable
and Unlosable` for all practical purposes. Tall claim, but I will get to
the details in a bit.

Before that, here is a little context to set the perspective…

I was introduced to Bitcoin by a friend in 2017 and realized how late I was
to the party.

Bitcoin Cash's block size debate was a hot topic then and so were many
hacks and heists affecting various cryptocurrency exchanges across the
world.

I personally did not like the idea of increasing block size to accommodate
more transactions and also thought that Cold Storage and Multi-Sig security
for Hot Wallets (BitGo) is just the beginning.

We thought micro and high frequency transactions should ideally be handled
by intermediaries who settle balances periodically, while larger
transactions and settlements happen directly on Blockchain. Even if
Lightning Network handles all micro-transactions, we cannot completely rule
out all intermediaries and we still need exchanges, etc. to interface with
the offline world. This felt like a healthy compromise while preserving the
spirit of Bitcoin.

But given the security requirements and concerns surrounding Bitcoin and
other cryptocurrencies, any kind of pooling in the hands of any
intermediary such as an exchange, wallet, escrow, etc., makes it a hot
target for hackers.

To mitigate this problem, me and my fellow compatriots set out to create a
safer way to store cryptocurrencies both for individuals and enterprises.

After nearly two years of brainstorming and toiling we have come up with
CoinVault, a second layer technology, that can ensure the safety and
security of Bitcoin and other cryptocurrencies for both large and small
entities.

Below is an overview of CoinVault technology specifically adopted to secure
Cryptocurrency Exchanges and Wallets. Please find the figures referred to
in the below text in the PDF attached. The complete draft is also attached
as a PDF if you prefer printing and reading it. A video overview
<https://www.youtube.com/watch?v=yDvLqTv1FDg> is also attached for those
who prefer a video over text.

Any and every feedback will help us iterate and serve the ecosystem better.
We are all ears for your comments and suggestions.



-----------------~~~~~~~~~~~~~~~-----------------


Secure Cryptocurrency Exchange & Wallet

Dr. Praveen Baratam

Background:

Cryptocurrencies in general are both acquired and traded on an electronic
exchange that lists different cryptocurrencies/crypto-assets often with
other assets such as fiat currencies issued by central banks of various
countries and enables trading between them. Most of these exchanges are
custodial in nature and act as trusted third parties where trading parties
transfer both cryptocurrencies and other assets in their control/possession
to the exchange controlled addresses/accounts and get notional limits on
the exchange to trade. All this works well as long as there is no security
breach on the exchange.

Since most cryptocurrencies are secured by public-key encryption which is
knowledge based, any security breach on the exchange’s systems can be
disastrous. And any adversary gaining access to exchange’s private-keys can
irreversibly steal the cryptocurrencies in its custody leading to huge loss
of wealth for trading parties and loss of trust within the ecosystem. We
have seen this scenario playout with many cryptocurrency exchanges all over
the world at some point or the other and approximately 15 Billion USD worth
cryptocurrencies were stolen from them as of Dec 2017. This has become the
Achilles heel of the cryptocurrency world off late.

Over time cryptocurrency exchanges have evolved several strategies such as
Hot-Wallets coupled with Cold/Offline Storage, Multi-Signature arrangements
with third-parties that serve as gatekeepers to enforce limits on
transactions, insurance for hot funds, etc. But most of these strategies
have proved inadequate and/or were circumvented over the past few years by
increasingly sophisticated attacks. eg: BitFinex lost $71 Million USD worth
of Bitcoin in spite of Multi-Signature arrangements with BitGo.

The same is true for Custodial Cryptocurrency Wallet Services, hereafter
referred to as Cryptocurrency Wallets, that store users’ funds/tokens with
them and allow their users to make transactions like a bank. They then
settle these transactions on their users’ behalf. Most Cryptocurrency
Exchanges also double up as Cryptocurrency Wallets for their users allowing
transacting parties to pay/accept in cryptocurrencies/assets of their
choice and managing the conversion for them when necessary.

There is an urgent need for securing cryptocurrency exchanges and wallets
to prevent further losses and bolster general faith in the cryptocurrency
ecosystem.

Solution:

The following describes an arrangement and method, in its simplest form,
between two parties (First Party and Second Party where the Second Party is
acting as Secure Cryptocurrency Exchange and/or Wallet for the First Party)
participating in a cryptocurrency network/system to effectively reduce the
probability of loss or theft of the First Party’s funds/tokens while
guaranteeing settlement between trading/transacting parties by the Second
Party. Hereafter, the term Cryptocurrency Exchange, shall also imply
Cryptocurrency Wallet wherever relevant.

The method presumes that unrecoverable hardware wallets (or rendered
unrecoverable by not-recording / discarding the backup/seed) without any
provision for recovery of the private-keys/secrets stored inside it in case
of loss or malfunction of the device, hereafter referred to as hardware
tokens, and time-locks for transaction outputs are available for the
crypto-currency system of interest. Relative time-locks
(CheckSequenceVerify) similar to the one described in Bitcoin Improvement
Proposal 112 are more desirable than absolute time-locks
(CheckLockTimeVerify) similar to the one described in Bitcoin Improvement
Proposal 65. The subsequent discussion assumes relative time-locks are
available for the cryptocurrency of interest even though similar
functionality can be devised using absolute time-locks too.

The method and arrangement proceeds as follows:


   1.

   At inception, the First Party creates a transaction similar to the one
   depicted in Figure 1, hereafter called the Deposit Transaction, in which
   the First Party transfers an arbitrary sum of funds/tokens in its control
   to a multi-signature address but does not yet sign or broadcast it. The
   multi-signature address in the Deposit Transaction requires the following
   signatures to authenticate and spend/transfer from it:

   1.

      First Party’s Private Key generated Signature
      2.

      First Party’s Hardware Token generated Signature
      3.

      Second Party’s Private Key generated Signature

      2.

   Then, the First Party creates a second transaction, hereafter referred
   to as Provisional Transaction, as depicted in Figure 2, spending all the
   funds/tokens sent to the multi-signature address in the Deposit
   Transaction, and sends a copy of the Provisional Transaction without any
   signed inputs or signatures, to the Second Party. Please note that the
   Provisional transaction is spending from an unconfirmed Deposit Transaction.

   3.

   Then, the Second Party adds its  Private Key generated signature to the
   unsigned Provisional Transaction received from the First Party and then
   sends the partially signed Provisional Transaction back to the First Party.

   4.

   In the meantime, the First Party also adds its Private Key generated
   signature and the signature generated by the hardware token in its
   possession to the unsigned copy of the Provisional Transaction it created
   and sends the partially signed Provisional Transaction to the Second Party.

   Note: The signatures used in this scheme sign the transaction similar to
   SIGHASH_ALL or SIGHASH_SINGLE in BitCoin protocol where the corresponding
   output of the transaction cannot be modified once signed.

   5.

   At this point in time, the First Party is in possession of the partially
   signed Provisional Transaction with Second Party’s Private Key generated
   signature added to it and the Second Party is in possession of the
   partially signed Provisional Transaction with First Party’s Private Key
   generated signature and the signature generated by the hardware token in
   First Party’s possession added to it.

   6.

   Then, the First Party signs and broadcasts the Deposit Transaction it
   created to the cryptocurrency network/system completing the setup process.
   The whole process in outlined in Figure 3.

   7.

   Once the Deposit Transaction is confirmed, both First Party and Second
   Party start monitoring the Cryptocurrency network directly and/or using
   third party services for transactions referencing the Multi-Signature
   output address described above from the Deposit Transaction to detect any
   breach of security or foul play.

   8.

   Subsequently, the First Party, at its discretion, can add its Private
   Key generated signature and the signature generated by the hardware token
   in its possession to the partially signed Provisional Transaction with the
   Second Party’s Private Key generated signature and broadcast the fully
   signed Provisional Transaction to the cryptocurrency network/system when
   necessary.

   9.

   Similarly, the Second Party can add its Private Key generated signature
   to the partially signed Provisional Transaction with the First Party’s
   Private Key generated signature and the signature generated by the hardware
   token in possession of the First Party and broadcast the fully signed
   Provisional Transaction to the cryptocurrency network/system when necessary.

   10.

   To sum it up, either parties can add missing signatures to the partially
   signed Provisional Transaction in their possession and broadcast them when
   necessary.

   11.

   As soon as the Provisional Transaction is broadcasted, the
   cryptocurrency monitoring systems prompt both parties to initiate recovery
   if it is not broadcasted by them to begin with. Either ways First Party or
   the Second Party in coordination with the other or optionally unilaterally
   create and broadcast a transaction using the respective options of the
   Provisional Transaction transferring the funds/tokens to a desired address
   terminating the arrangement.


Description

Cryptocurrency Exchanges act as custodial escrow agents for the trading
entities participating on their platforms to minimize counter party risk
and guarantee settlement. However, this escrow mechanism, with respect to
cryptocurrencies, creates a new problem of keeping third party funds/tokens
in their custody safe and secure. A security breach on the respective
Cryptocurrency Exchanges’ systems can compromise the private-keys securing
the funds in its custody and lead to loss/theft of respective funds/tokens.

In the proposed scheme/arrangement a Cryptocurrency Exchange can enforce
settlement albeit with a predefined delay and does not need exclusive
custody of the said funds/tokens beforehand to guarantee settlement.
Moreover, in the event of a security breach on one or both sides, there are
remedial steps that the Cryptocurrency Exchange and/or First Party can take
to prevent loss or theft of respective funds/tokens.

Generally, First Party will cooperate with Second Party in the settlement
process and in situations where it disagrees or refuses to cooperate, the
Cryptocurrency Exchange (Second Party) can get exclusive custody of the
respective funds/tokens and enforce settlements as per the terms of the
contractual service agreement with the First Party.

For instance, when the First Party is in disagreement with a proposed
settlement for a trade, the Cryptocurrency Exchange (Second Party) can use
the Option 2 as depicted in Figure 2 and take exclusive custody of the
respective funds/tokens to enforce settlement. This option allows the
Cryptocurrency Exchange to function as a regular custodial escrow between
trading parties as is the case with most exchanges and in general.

In another instance, if a Cryptocurrency Exchange suffers a security breach
and its private-keys are compromised/stolen, it can use Option 1, 2, 3, 7
or 8 depicted in Figure 2 to transfer the funds/tokens to another secure
address or back to the First Party as may be desired. Cryptocurrency
Exchanges can even prevent loss/theft using Option 7 depicted in Figure 2
and transfer the respective funds/tokens away from the compromised address
even when its hardware tokens are lost/stolen in the above described
situation.

Also, the Cryptocurrency Exchange (Second Party) can use Option 2 depicted
in Figure 2 and transfer the respective funds/tokens to a secure address
when First Party’s private-key and/or hardware token are
compromised/lost/stolen.

The Confusion Matrix in Figure 4 enumerates the options available and
outcomes of situations where private-keys and/or hardware tokens of First
Party and/or Second Party are compromised or stolen. It also enumerates
situations where respective private-keys are lost by First Party but not
Second Party.

Since Second Party is an organized entity that can employ data-safety
measures such as multi-site replication, offline storage, etc. this method
does not explicitly specify the process and enumerate options available
when Second Party’s private-keys are lost for simplicity and brevity. This
method can be analogously extended to this scenario and more or simplified
if desired by reordering,adding or removing options in the Provisional
Transaction accordingly when planning and accounting for certain
contingencies are deemed necessary or unnecessary. Also the timelocks
mentioned in the Provisional Transaction are one of the many possible
values for them exemplifying a particular order and can be adjusted as
necessary to suit a particular arrangement.

It should be noted here that the Second Party always gets first claim on
the respective funds/tokens as it is accepting a liability on First Party’s
behalf and can steal First Party’s funds/tokens but will not do so because
such unilateral actions will result in loss of trust/business from other
parties as well as legal proceedings by the First Party. Hence, the
incentive and motive to cheat the First Party of its funds/tokens by Second
Party is non-existent. But if First Party and/or Second Party are
compromised either by an internal or external adversary, they still have
recourse and can reconcile the situation by taking remedial steps available.

Finally, even if Hardware Tokens are not available and we have to rely on
relative/absolute timelocks only, the method and scheme described above can
be scaled down as depicted in Figure 5 and still offer better protection
than currently practiced multi-signature arrangements.


https://www.youtube.com/watch?v=yDvLqTv1FDg


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