Custody Protocols Using Bitcoin Vaults

Abstract

A bitcoin covenant is a mechanism to enforce conditions on future bitcoin transactions. A bitcoin vault is a specific type of covenant transaction that enforces a time-lock on the transfer of control of funds to a hot wallet, but enables an immediate transfer of funds into a deep cold recovery wallet. This paper demonstrates how to integrate a bitcoin vault into a custody protocol and demonstrates the security properties of that protocol. The vault is implemented using pre-signed transactions with secure key deletion (as proposed in [SHMB20]). It is shown that vault-custody protocols enable the wallet owner to specify their desired balance for an inherent trade-off between the security of and accessibility of bitcoin holdings by adjusting the length of time-locks used. It is also demonstrated that wallet owners have increased control of risk-management by compartmentalizing funds across numerous vault transactions. While it isn't realistic to completely prevent theft, the most likely theft scenarios (compromising the hot wallet) have severely limited profitability for an attacker, deterring attempts at theft from the beginning. The proposed architecture was designed to offer defence-in-depth through redundancy and fault-tolerant functionality as well as countermeasures for class breaks through diversity across hardware and software layers. Finally, the architecture employs a detection (a watchtower) and response system that enables fail-safe recovery from attempted or partial thefts through a second type of covenant transaction, a push-to-recovery-wallet transaction.

Novel Cryptocurrency Investment Approaches: Risk Reduction and Diversification through Index Based Strategies

“…Some software platforms, such as the Komodo Wallet, offer a multi-folio option, where several parallel portfolios can be created, each with its own set of private keys and secure password (Figure 2) [78,79]. Vaults and other multi-stakeholder custodial solutions have also been introduced, where assets are essentially "irretrievably locked" until a certain pre-defined number of authorized users "agree in principle" to release such assets to a third-party address [80]. This approach represents an attractive option for multi-person entities, such as families or small investment clubs, where assets can only be moved when a pre-determined number of participants all agree on a specific transfer operation.…”

Unlocking Blockchain UTXO Transactional Patterns and Their Effect on Storage and Throughput Trade-Offs

“…Upon analysis, it is meaningful that certain transactions with a larger number of outputs have a lower storage cost, especially in the 0.05 to 0.06 MB range. This variability in storage arises from the diversity of transaction types in Bitcoin, which includes standard transactions, Multisig transactions [39], Pay-to-Script-Hash (P2SH) transactions [40], SegWit transactions [41], CoinJoin transactions [42], and time-locked transactions [43]. Each type has its unique storage characteristics and requirements, reflecting the variety of transactions observed in the graph.…”

Phoenix: A Formally Verified Regenerating Vault

“…Swambo et al have proposed a custody protocol based on a vault contract for Bitcoin to control funds from loss and theft [44]. They implemented their vault contract using pre-signed transactions and secure key-deletions.…”

“…Phoenix's delay value is set at creation time and cannot be changed. As noted by Swambo et al [44], the choice of the delay's length allows the user to choose their desired balance between accessibility and security. A short delay means less time for the user to respond to a breach and increases the risk of an unauthorized transaction.…”