In case the festivities have played havoc with your mental calendar, today is Jan 3. That means it’s now 11 years since the Bitcoin Genesis block was mined (in other words, it’s Bitcoin’s birthday).
And it’s also the annual Proof of Keys celebration created by Trace Mayer.
So, what exactly is that and what do people mean when they say “not your keys, not your crypto”? Let’s take a closer look…
What is Proof of Keys?
The Proof of Keys celebration is all about taking control of your funds. Contrary to popular belief, when you own cryptocurrencies, you never actually own any digital coins.
What you receive when you purchase cryptos are private keys that give you access to the funds you bought. These are a long jumble of letters and numbers allowing you to make transactions.
When you keep your BTC, ETH, or any cryptocurrency on an exchange or similar third-party service, you rescind control of your private keys. This has a few implications, as you can see in the helpful explainer video below by exodus.io.
You see, we’re very used to giving up control of our money to banks. We deposit our earnings into a bank and trust them to keep it safe. But people have been burnt before from bank collapses and account freezes.
And when it comes to cryptocurrency, this nascent space presents some risks of its own.
While regulators are getting stricter, there is still a real lack of protection for exchange users whose funds may be exposed to hacks.
There’s also the possibility that the exchange or wallet provider you use becomes insolvent, has its accounts frozen, or pulls a salacious exit scam.
In the event that a less-than-desirable event like a hack or fraud happens to the service you keep your crypto on, you may have no way of getting it back.
That’s why people say “not your keys, not your crypto” as you don’t have control over what happens to your crypto-assets.
Keeping your funds on an exchange is convenient and easy. However, what the Proof of Keys event is trying to promote is awareness among cryptocurrency users.
How does Proof of Keys Work?
You don’t have to be an experienced user to participate in the Proof of Keys celebration today. As Trace Mayer explains in the above video, all you need to do is withdraw all your BTC (or other cryptos) from any third-party service, “just to prove that they’re there”.
Depending on your cryptocurrency and your choice of wallet, you’ll need to take different steps. This can present a challenge for a novice user but it’s essential if you want to prevent falling victim to another of the industry’s rampant hacks and scams. It’s also an excellent lesson in self-sovereignty.
As Exodus explains in the video, if you don’t have control of your own keys, that means the exchange does. They are the custodian of your funds (just like a bank).
A noncustodial solution, on the other hand, is where you can be 100% certain that the funds are your own and within your control.
For example, the cash in your wallet is completely yours, there is no third party involved. The same applies to cryptocurrency.
A centralised crypto exchange is just like your bank. You deposit and withdraw funds, but the exchange controls them and merely allows you access.
The exchange controls the keys and can access all accounts on the system. This is where noncustodial solutions are so important, but they’re “not all unicorns and rainbows”.
Disadvantages of noncustodial solutions
While exchanges can be targets for hackers or deny access to your funds, noncustodial solutions are not perfect either. Being in full control of your crypto funds places the whole responsibility on you.
You need to learn how to store your private keys correctly, ensure that you have a backup seed safely stored separately and generally learn more about interacting with the blockchain.
You also run the risk of losing your crypto if you use a solution like Ballet hardware wallet which has no recovery.
At the end of the day, when it comes to managing your crypto assets, it’s really up to you. You may hold little and prefer to accept the risks and disadvantages of centralised exchanges.
But if you do choose to do this, you can still participate in the Proof of Keys celebration. It is an excellent way of proving that your funds are available when you want them.
Not only that, but it’s an extremely useful exercise in learning how to use a noncustodial wallet or simply reminding yourself how to make a transaction.