Crypto Security Essentials: Secure Encryption Key Management

Introduction

More and more people are entering the cryptocurrency market, which has been expanding quickly in recent years. But as cryptocurrencies gain popularity, security risks also grow. It’s imperative to make sure that your cryptocurrency assets are secure if you plan to invest in or hold them, and managing your encryption keys properly is a major component of that security.

Your Bitcoin holdings’ security depends heavily on encryption keys. They are used to encrypt and decrypt the data in your digital assets and are required for blockchain transaction signature. Your digital assets are vulnerable to theft or compromise without adequate encryption key management.

What are Cryptographic Keys, and Why Should They Be Kept Safe?

1. Cryptographic keys are critical to modern cryptography and are used to secure digital data and communications. Practically, cryptographic keys are a string of bits or characters that are used to encrypt or decrypt data. They transform plain text into an unreadable cipher text, which can only be deciphered with the correct key.

2. Cryptographic keys are designed to be kept secret, as they are the key to unlocking and securing encrypted data. If an attacker obtains the key, they can easily access the encrypted data and use it for malicious purposes, such as stealing sensitive information, modifying or deleting data, or launching cyberattacks.

There are two types of encryption keys: symmetric and asymmetric. Asymmetric algorithms use distinct keys’the encryption key is referred to as the public key and the decryption key is referred to as the private key?in contrast to symmetric algorithms, which use the same key for both encryption and decryption.

For authenticating data, we often think of signing and verifying as an asymmetric algorithm.

If Alice wants to send a secret message to Bob using symmetric cryptography, she will generate a cipher or key to encrypt that data. Bob receives the encrypted message and can decrypt it once he has the key.

The problem is, how does Bob get the symmetric key to decrypt the message? Clearly, this cannot just be sent out in the open, thus Bob needs a different technique to obtain the secret key. This is known as the key distribution problem.

This issue was resolved in the middle of the 1970s with the development of the asymmetric type of encryption discussed above, also known as public key cryptography.

Alice delivers a message to Bob and encrypts it with his public key using public key cryptography. The message can be intercepted by anyone, but only Bob has the private key needed to decipher it.

Public keys are given to wallets in the cryptocurrency world, and a public key is valid if the wallet has some cryptocurrency.

It is very important to keep private keys private.

Alice’s private keys provide a malicious third party complete control over all of the money in her wallet. Hackers invest a lot of time and effort into creating sophisticated phishing schemes that are intended to trick victims into disclosing their private keys.

What is Multisig?

How Multisignature Security Works?

1. Suppose a company called XYZ wants to set up a multisig wallet to store their Bitcoin holdings. They want to ensure that no single individual has control over the funds and that all transactions require the approval of multiple parties.

2. To set up a multisig wallet, XYZ selects three employees and creates a 2-of-3 multisig setup. This means that any two out of the three employees must sign off on a transaction before it can be authorized.

3. Each employee is given a private key, which is used to sign transactions. When a transaction is initiated, the multisig wallet software prompts each employee to provide their private key to authorize the transaction.

4. For example, if employee A wants to transfer 1 Bitcoin from the multisig wallet to another address, they would initiate the transaction and provide their private key. The wallet software would then prompt employees B and C to provide their private keys to complete the transaction. If two of the three employees provide their private keys, the transaction is authorized, and the Bitcoin is transferred.

5. In this way, multisig provides an extra layer of security, as it prevents any single employee from making unauthorized transactions or accessing the funds without the approval of the other employees. It also provides protection against hacking attempts or malicious attacks, as an attacker would need to compromise multiple private keys to steal the funds.

What is a Hardware Security Module?

1. A hardware security module (HSM) is a physical computing device that provides secure storage and management of digital keys and cryptographic operations. HSMs are designed to securely generate, store, and protect private keys, ensuring that they cannot be accessed by unauthorized individuals.

2. HSMs are typically used in high-security environments, such as financial institutions, government agencies, and large enterprises. They are used to secure digital assets, such as passwords, encryption keys, and digital certificates.

3. One of the key advantages of HSMs is their physical security. They are tamper-resistant devices, meaning that any attempt to physically access or modify the device will result in its destruction or make the device inoperable. Additionally, HSMs are often designed to meet strict regulatory standards for security, such as FIPS 140-2 or Common Criteria, providing an extra layer of assurance that the device has been independently tested and verified to meet rigorous security requirements.

4. HSMs provide a number of benefits over software-based security solutions. For example, HSMs can generate and store cryptographic keys securely, and prevent the keys from being copied or exported. HSMs can also perform cryptographic operations, such as encryption and decryption, much faster than software-based solutions.

5. In addition, HSMs can be used to create secure digital signatures, which can be used to authenticate the identity of individuals or organizations in digital transactions. HSMs are also used to store and manage digital certificates, which are used to establish the authenticity of digital identities in web transactions, such as online banking or e-commerce.

What is Multiparty Computation?

1. Multiparty computation (MPC) is a technique in cryptography that allows multiple parties to jointly compute a function without revealing their private inputs to each other. In MPC, each party holds a private input value, and the goal is to compute a function of these inputs without revealing any individual input value to any of the other parties.

2. MPC is useful in a variety of applications, including secure data analysis, private auctions, and digital signatures. It allows parties to collaborate and share information without revealing sensitive data, ensuring that each party retains control over their own private input.

3. There are several different approaches to MPC, including secret sharing and secure function evaluation. 

4. In secret sharing, the private inputs are divided into shares, and each party holds one share. The function is computed using the shares, without revealing the underlying inputs. 

5. In secure function evaluation, each party evaluates a function on their own input, and the results are combined to compute the final output, without revealing any private inputs.

6. MPC is used in a variety of applications, including secure data analysis, privacy-preserving machine learning, and secure auctions. For example, in secure data analysis, MPC can be used to compute statistical measures of a dataset without revealing individual data points to any party. In privacy-preserving machine learning, MPC can be used to train machine learning models on encrypted data, without revealing the data to any party.

Comparing Multisig, HSM and MPC in Cryptocurrencies

Multisig, HSM, and MPC are all important techniques in the field of cryptocurrency security, each with its own strengths and weaknesses. Here is a comparison of these techniques in terms of their advantages and applications:

Multisig

1. Multisig is a technique that requires multiple signatures to authorize a transaction, making it more difficult for malicious actors to steal or compromise digital assets. 
2. Multisig is a widely used security feature in cryptocurrency wallets and exchanges, providing an extra layer of security against unauthorized access.
3.  Multisig is relatively easy to implement and requires no specialized hardware, making it a popular choice for small to medium-sized businesses.

Hardware Security Module (HSM)

1. HSMs are specialized devices that provide secure storage and management of digital keys and cryptographic operations. HSMs are highly secure, tamper-resistant devices that provide an extra layer of security for digital assets. 
2. HSMs are commonly used by large enterprises and government agencies to secure digital assets, such as passwords, encryption keys, and digital certificates. 
3. HSMs are expensive and require specialized hardware and software to implement, making them a more costly solution for smaller businesses.

Multiparty Computation (MPC)

1. MPC is a technique in cryptography that allows multiple parties to jointly compute a function without revealing their private inputs to each other. 
2. MPC is useful in a variety of applications, including secure data analysis, private auctions, and digital signatures. MPC is highly secure and ensures that each party retains control over their own private input. 
3. However, MPC is a relatively new and complex technology that requires specialized expertise to implement, making it a more challenging solution for most businesses.

Who Requires Secure Key Management Practices?

Each company that deals with sizable quantities of money or a lot of digital assets needs safe key management procedures.

This covers native custodians in the cryptocurrency industry like Coinbase Custody, BitGo, or Gemini. It also includes established organisations that have entered the digital asset market, including Fidelity or ICE’s Bakkt.

Secure key management procedures are also necessary for crypto exchanges. Despite the exchange industry’s maturation, 2019 alone saw a record 12 significant hacks.

Key Management Providers Examples

1. BitGo: It is perhaps one of the best-known operators in the institutional wallet space. The company provides custody and liquidity solutions for over 100 coins, combining hot and cold wallets, policy management and multisig capabilities.

2. Curv: Another service provider employing MPC for transaction signing and blockchain publishing is Curv. Its policy engine enables flexible and cutting-edge approval policies in accordance with client needs. The Curv service and the client both have their own set of encryption keys.

Conclusion

Crypto security is all about ensuring the safety of your digital assets, and secure encryption key management is a crucial part of that.

By using a hardware wallet, creating strong passwords and passphrases, backing up your keys, using multi-signature wallets, and keeping your keys safe and private, you can significantly reduce the risk of your crypto assets being compromised.

Remember to always stay vigilant and take the necessary precautions to protect your investments.