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CH11: edits for consistency with rest of the book
- s/bitcoin/Bitcoin/ when appropriate - Proof of work is only part of security - Mining is separate from verificatino - Kill BIP38 encrypted private keys section (mention seeds instead)
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David A. Harding
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ch11.asciidoc
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ch11.asciidoc
@ -1,34 +1,35 @@
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[[ch11]]
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== Bitcoin Security
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Securing bitcoin is challenging because bitcoin is not an abstract
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reference to value, like a balance in a bank account. Bitcoin is very
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Securing your bitcoins is challenging because bitcoins are
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are not like a balance in a bank account. Your bitcoins are very
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much like digital cash or gold. You've probably heard the expression,
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"Possession is nine-tenths of the law." Well, in bitcoin, possession is
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ten-tenths of the law. Possession of the keys to unlock the bitcoin is
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"Possession is nine-tenths of the law." Well, in Bitcoin, possession is
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ten-tenths of the law. Possession of the keys to spend certain bitcoins is
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equivalent to possession of cash or a chunk of precious metal. You can
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lose it, misplace it, have it stolen, or accidentally give the wrong
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amount to someone. In every one of these cases, users have no recourse,
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just as if they dropped cash on a public sidewalk.
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However, bitcoin has capabilities that cash, gold, and bank accounts do
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not. A bitcoin wallet, containing your keys, can be backed up like any
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However, the Bitcoin system has capabilities that cash, gold, and bank accounts do
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not. A Bitcoin wallet, containing your keys, can be backed up like any
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file. It can be stored in multiple copies, even printed on paper for
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hard-copy backup. You can't "back up" cash, gold, or bank accounts.
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Bitcoin is different enough from anything that has come before that we
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need to think about bitcoin security in a novel way too.
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need to think about securing your bitcoins in a novel way too.
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=== Security Principles
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((("security", "security principles", id="Sprinc11")))((("decentralized
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systems", "security of")))The core principle in bitcoin is
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systems", "security of")))The core principle in Bitcoin is
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decentralization and it has important implications for security. A
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centralized model, such as a traditional bank or payment network,
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depends on access control and vetting to keep bad actors out of the
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system. By comparison, a decentralized system like bitcoin pushes the
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responsibility and control to the users. Because security of the network
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is based on Proof-of-Work, not access control, the network can be open
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and no encryption is required for bitcoin traffic.
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system. By comparison, a decentralized system like Bitcoin pushes the
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responsibility and control to the users. Because the security of the network
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is based on independent verification, the network can be open
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and no encryption is required for Bitcoin traffic (although encryption
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can still be useful).
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On a traditional payment network, such as a credit card system, the
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payment is open-ended because it contains the user's private identifier
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@ -43,61 +44,50 @@ when customer data is compromised, the customers are exposed to identity
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theft and must take action to prevent fraudulent use of the compromised
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accounts.
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Bitcoin is dramatically different. A bitcoin transaction authorizes only
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a specific value to a specific recipient and cannot be forged or
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modified. It does not reveal any private information, such as the
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Bitcoin is dramatically different. A Bitcoin transaction authorizes only
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a specific value to a specific recipient and cannot be forged.
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It does not reveal any private information, such as the
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identities of the parties, and cannot be used to authorize additional
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payments. Therefore, a bitcoin payment network does not need to be
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payments. Therefore, a Bitcoin payment network does not need to be
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encrypted or protected from eavesdropping. In fact, you can broadcast
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bitcoin transactions over an open public channel, such as unsecured WiFi
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or Bluetooth, with no loss of security.
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Bitcoin's decentralized security model puts a lot of power in the hands
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of the users. With that power comes responsibility for maintaining the
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secrecy of the keys. For most users that is not easy to do, especially
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secrecy of their keys. For most users that is not easy to do, especially
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on general-purpose computing devices such as internet-connected
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smartphones or laptops. Although bitcoin's decentralized model prevents
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smartphones or laptops. Although Bitcoin's decentralized model prevents
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the type of mass compromise seen with credit cards, many users are not
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able to adequately secure their keys and get hacked, one by one.
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==== Developing Bitcoin Systems Securely
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((("decentralized systems", "bitcoin as")))The most important principle
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for bitcoin developers is decentralization. Most developers will be
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for Bitcoin developers is decentralization. Most developers will be
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familiar with centralized security models and might be tempted to apply
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these models to their bitcoin applications, with disastrous results.
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these models to their Bitcoin applications, with disastrous results.
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Bitcoin's security relies on decentralized control over keys and on
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independent transaction validation by miners. If you want to leverage
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bitcoin's security, you need to ensure that you remain within the
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bitcoin security model. In simple terms: don't take control of keys away
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from users and don't take transactions off the blockchain.
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independent transaction validation by users. If you want to leverage
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Bitcoin's security, you need to ensure that you remain within the
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Bitcoin security model. In simple terms: don't take control of keys away
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from users and don't outsource validation.
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For example, many early bitcoin exchanges concentrated all user funds in
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For example, many early Bitcoin exchanges concentrated all user funds in
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a single "hot" wallet with keys stored on a single server. Such a design
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removes control from users and centralizes control over keys in a single
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system. Many such systems have been hacked, with disastrous consequences
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for their customers.
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((("transactions", "off blockchain")))((("off-blockchain
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transactions")))Another common mistake is to take transactions "off
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blockchain" in a misguided effort to reduce transaction fees or
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accelerate transaction processing. An "off blockchain" system will
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record transactions on an internal, centralized ledger and only
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occasionally synchronize them to the Bitcoin blockchain. This practice,
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again, substitutes decentralized bitcoin security with a proprietary and
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centralized approach. When transactions are off blockchain, improperly
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secured centralized ledgers can be falsified, diverting funds and
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depleting reserves, unnoticed.
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Unless you are prepared to invest heavily in operational security,
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multiple layers of access control, and audits (as the traditional banks
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do) you should think very carefully before taking funds outside of
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bitcoin's decentralized security context. Even if you have the funds and
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Bitcoin's decentralized security context. Even if you have the funds and
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discipline to implement a robust security model, such a design merely
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replicates the fragile model of traditional financial networks, plagued
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by identity theft, corruption, and embezzlement. To take advantage of
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bitcoin's unique decentralized security model, you have to avoid the
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Bitcoin's unique decentralized security model, you have to avoid the
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temptation of centralized architectures that might feel familiar but
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ultimately subvert bitcoin's security.
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@ -123,12 +113,12 @@ operating system to higher-level system services, and finally across
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many servers layered in concentric circles of diminishing trust.
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((("mining and consensus", "security and consensus")))Bitcoin security
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architecture is different. In bitcoin, the consensus system creates a
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architecture is different. In Bitcoin, the consensus system creates a
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trusted public ledger that is completely decentralized. A correctly
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validated blockchain uses the genesis block as the root of trust,
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building a chain of trust up to the current block. Bitcoin systems can
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and should use the blockchain as their root of trust. When designing a
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complex bitcoin application that consists of services on many different
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complex Bitcoin application that consists of services on many different
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systems, you should carefully examine the security architecture in order
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to ascertain where trust is being placed. Ultimately, the only thing
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that should be explicitly trusted is a fully validated blockchain. If
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@ -141,12 +131,12 @@ under the control of a malicious actor. Take each component of your
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application, in turn, and assess the impacts on the overall security if
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that component is compromised. If your application is no longer secure
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when components are compromised, that shows you have misplaced trust in
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those components. A bitcoin application without vulnerabilities should
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be vulnerable only to a compromise of the bitcoin consensus mechanism,
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those components. A Bitcoin application without vulnerabilities should
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be vulnerable only to a compromise of the Bitcoin consensus mechanism,
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meaning that its root of trust is based on the strongest part of the
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bitcoin security architecture.
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Bitcoin security architecture.
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The numerous examples of hacked bitcoin exchanges serve to underscore
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The numerous examples of hacked Bitcoin exchanges serve to underscore
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this point because their security architecture and design fails even
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under the most casual scrutiny. These centralized implementations had
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invested trust explicitly in numerous components outside the Bitcoin
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@ -166,7 +156,7 @@ constantly exposed to external threats via always-on internet
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connections. They run thousands of software components from hundreds of
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authors, often with unconstrained access to the user's files. A single
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piece of rogue software, among the many thousands installed on your
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computer, can compromise your keyboard and files, stealing any bitcoin
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computer, can compromise your keyboard and files, stealing any bitcoins
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stored in wallet applications. The level of computer maintenance
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required to keep a computer virus-free and trojan-free is beyond the
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skill level of all but a tiny minority of computer users.
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@ -185,17 +175,17 @@ we have seen ever-escalating thefts. Bitcoin escalates this problem
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because it doesn't need to be fenced or laundered; it is intrinsic value
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within a digital asset.
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Fortunately, bitcoin also creates the incentives to improve computer
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Bitcoin also creates the incentives to improve computer
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security. Whereas previously the risk of computer compromise was vague
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and indirect, bitcoin makes these risks clear and obvious. Holding
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bitcoin on a computer serves to focus the user's mind on the need for
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and indirect, Bitcoin makes these risks clear and obvious. Holding
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bitcoins on a computer serves to focus the user's mind on the need for
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improved computer security. As a direct result of the proliferation and
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increased adoption of bitcoin and other digital currencies, we have seen
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increased adoption of Bitcoin and other digital currencies, we have seen
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an escalation in both hacking techniques and security solutions. In
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simple terms, hackers now have a very juicy target and users have a
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clear incentive to defend themselves.
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Over the past three years, as a direct result of bitcoin adoption, we
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Over the past three years, as a direct result of Bitcoin adoption, we
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have seen tremendous innovation in the realm of information security in
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the form of hardware encryption, key storage and hardware wallets,
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multisignature technology, and digital escrow. In the following sections
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@ -208,54 +198,51 @@ wallets")))((("wallets", "types of", "paper wallets")))((("paper
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wallets", see="also wallets")))Because most users are far more
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comfortable with physical security than information security, a very
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effective method for protecting bitcoin is to convert them into physical
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form. Bitcoin keys are nothing more than long numbers. This means that
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form. Bitcoin keys, and the seeds used to create them, are nothing more than long numbers. This means that
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they can be stored in a physical form, such as printed on paper or
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etched on a metal coin. Securing the keys then becomes as simple as
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physically securing the printed copy of the bitcoin keys. A set of
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bitcoin keys that is printed on paper is called a "paper wallet," and
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there are many free tools that can be used to create them. I personally
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keep the vast majority of my bitcoin (99% or more) stored on paper
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wallets, encrypted with BIP-38, with multiple copies locked in safes.
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((("cold storage")))((("storage", "cold storage")))Keeping bitcoin
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physically securing a printed copy of the key seed. A seed
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that is printed on paper is called a "paper backup," and
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many wallets can create them.
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Keeping bitcoins
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offline is called _cold storage_ and it is one of the most effective
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security techniques. A cold storage system is one where the keys are
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generated on an offline system (one never connected to the internet) and
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stored offline either on paper or on digital media, such as a USB memory
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stick.
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==== Hardware Wallets
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==== Hardware Signing Devices
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((("wallets", "types of", "hardware wallets")))((("hardware
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wallets")))In the long term, bitcoin security increasingly will take the
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form of hardware tamper-proof wallets. Unlike a smartphone or desktop
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computer, a bitcoin hardware wallet has just one purpose: to hold
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bitcoin securely. Without general-purpose software to compromise and
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with limited interfaces, hardware wallets can deliver an almost
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foolproof level of security to nonexpert users. I expect to see hardware
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wallets become the predominant method of bitcoin storage. For an example
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of such a hardware wallet, see the https://trezor.io/[Trezor].
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((("hardware
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signing devices")))In the long term, Bitcoin security may increasingly take the
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form of tamper-proof hardware signing devices. Unlike a smartphone or desktop
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computer, a Bitcoin hardware signing device has just one purpose: to hold
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keys securely. Without general-purpose software to compromise and
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with limited interfaces, hardware signing devices can deliver an almost
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foolproof level of security to nonexpert users. Hardware
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signing devices may become the predominant method of bitcoin storage.
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==== Balancing Risk
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((("risk, balancing and diversifying", seealso="security")))Although
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most users are rightly concerned about bitcoin theft, there is an even
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bigger risk. Data files get lost all the time. If they contain bitcoin,
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the loss is much more painful. In the effort to secure their bitcoin
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most users are rightly concerned about theft of thir bitcoins, there is an even
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bigger risk. Data files get lost all the time. If they contain Bitcoin keys,
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the loss is much more painful. In the effort to secure their Bitcoin
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wallets, users must be very careful not to go too far and end up losing
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the bitcoin. In July 2011, a well-known bitcoin awareness and education
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their bitcoins. In July 2011, a well-known Bitcoin awareness and education
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project lost almost 7,000 bitcoin. In their effort to prevent theft, the
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owners had implemented a complex series of encrypted backups. In the end
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they accidentally lost the encryption keys, making the backups worthless
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and losing a fortune. Like hiding money by burying it in the desert, if
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you secure your bitcoin too well you might not be able to find it again.
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you secure your bitcoins too well you might not be able to find it again.
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==== Diversifying Risk
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Would you carry your entire net worth in cash in your wallet? Most
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people would consider that reckless, yet bitcoin users often keep all
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their bitcoin in a single wallet. Instead, users should spread the risk
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among multiple and diverse bitcoin wallets. Prudent users will keep only
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a small fraction, perhaps less than 5%, of their bitcoin in an online or
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people would consider that reckless, yet Bitcoin users often keep all
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their bitcoin using a single wallet application. Instead, users should spread the risk
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among multiple and diverse Bitcoin applications. Prudent users will keep only
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a small fraction, perhaps less than 5%, of their bitcoins in an online or
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mobile wallet as "pocket change." The rest should be split between a few
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different storage mechanisms, such as a desktop wallet and offline (cold
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storage).
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@ -284,10 +271,10 @@ Bitcoin users are told to use complex passwords and keep their keys
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secure and private, not sharing them with anyone. Unfortunately, that
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practice makes it almost impossible for the user's family to recover any
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funds if the user is not available to unlock them. In most cases, in
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fact, the families of bitcoin users might be completely unaware of the
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fact, the families of Bitcoin users might be completely unaware of the
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existence of the bitcoin funds.
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If you have a lot of bitcoin, you should consider sharing access details
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If you have a lot of bitcoins, you should consider sharing access details
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with a trusted relative or lawyer. A more complex survivability scheme
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can be set up with multi-signature access and estate planning through a
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lawyer specialized as a "digital asset executor."((("",
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@ -297,5 +284,5 @@ startref="Suser11")))((("", startref="UCsecurity11")))
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Bitcoin is a completely new, unprecedented, and complex technology. Over
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time we will develop better security tools and practices that are easier
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to use by nonexperts. For now, bitcoin users can use many of the tips
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discussed here to enjoy a secure and trouble-free bitcoin experience.
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to use by nonexperts. For now, Bitcoin users can use many of the tips
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discussed here to enjoy a secure and trouble-free Bitcoin experience.
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