Proof of Keys isn’t a new consensus algorithm for blockchain; instead, it’s just an event where people simultaneously pull all of their cryptocurrency out of centralized exchanges. One of the main goals of the event is to make sure that exchanges have the funds that they claim to have. After all, if they don’t, then there’s no guarantee that you actually have the coins you purchased on the exchange. So if it’s already an issue, at least it’s exposed sooner than later.
Does that sound familiar? Because it should. In essence, it’s a bank run. In my previous article, The History of Money, I described what a bank run basically is — one of the most famous bank run events occurred during the Great Depression, when citizens tried to withdraw their money from the banks as quickly as possible out of concern that the banks didn’t have enough money to give back to everyone, even though the banks claimed that they did. Then, well, the Great Depression happened, so… let’s hope history doesn’t repeat itself (just kidding, the Great Depression wasn’t only caused by a bank run — correlation doesn’t equal causation!).
The Nuclear Fallout of Proof of Keys
The Proof of Keys event on January 3rd, 2019 (the event is happening on January 3rd as a celebration of the 10th anniversary of the first Bitcoin block that was mined) will be a bank run except on centralized cryptocurrency exchanges instead of banks. I specify centralized because decentralized exchanges do not hold any assets on behalf of users; instead, users maintain control of their funds.
Rumors are already surging about exchanges like HitBTC supposedly freezing customer accounts prior to the event. These rumors are unconfirmed, but of course celebrities like John McAfee, the Donald Trump of cryptocurrency, loves to spark conspiracy rather than demand the facts, which leading to a blur between truth and inclination.
Despite the differences between how McAfee and I like to approach thinking, he isn’t incorrect to assume that exchanges might be weary of the Proof of Keys event. Exchanges do not like it for obvious reasons.
For one, it can significantly reduce the volume of assets to be traded. Exchanges want volume because it gives people an opportunity to trade more — and making more trades means earning more fees from the transactions. For example, if I want to buy Bitcoin at $3,700 and I went to an exchange but saw that the only offer was at $4,000 because everyone offering between $3,700 and $4,000 withdrew their coins instead, then I probably wouldn’t trade.
Furthermore, exchanges may not see the funds again. After all, if a user wants to trade again, what forces them to move their funds back to the same exchange? Exchanges like Binance have most of the coins a majority of traders are interested in, so users may not see the point in moving it back to a smaller exchange. As a result, exchanges will again see lower trading volume. If you don’t think low volume is too much of a problem, then I’d argue that you just haven’t felt the pain of waiting for two days for one trade to go through. It will certainly impact user experience and drive people to other exchanges.
How Do I Participate (in a smart way)?
If you want to withdraw your cryptocurrency and be a part of the first Proof of Keys event (the intention is to have more in the future), all you need is your own wallet address. This is a wallet address where you own the private key. But certainly take some precaution in order to more effectively participate in the event without compromising your identity or the security of your funds. Here are some tips:
1. Consider Using Temporary Addresses
If you intend to move it back on to the exchange at some point, consider using a temporary address. Exchanges track the addresses associated with accounts; therefore, by withdrawing all your funds to a personal address, you are likely associating that address with your identity. If you want to keep your address anonymous, then don’t withdraw to it from an exchange.
2. Do Not Use Keys You Think Are Compromised
Make absolutely certain that your private key(s) are not compromised. If, for example, you store your private keys in a Microsoft Word document or Google Doc (do not do that, that’s an example of exactly what not to do with your private keys), then chances are it’s not very secure and can easily be located by a simple virus. Proof of Keys is an event that will be a gold-mine for hackers with access to foreign wallets, so you want to be absolutely sure that your wallet’s private key is not compromised. There is no fool-proof way of knowing, unfortunately.
3. Make Sure You Use the Correct Blockchain Address
Make absolutely certain that you are entering the correct wallet address. This is less of a problem between bitcoin and ethereum, since the formatting is different. But many altcoins that originally existed on Ethereum have launched their own blockchains that originated as forks of Ethereum; therefore, they have the same wallet address formatting. For example, VeChain uses Ethereum address formatting. If you accidentally paste your Ethereum address in when trying to withdraw VeChain, then say bye to your VeChain tokens unless you own that same address on Ethereum.
4. Factor In Blockchain Network Congestion
Keep in mind the network congestion. Blockchains are not exactly scalable at this point, and if the event is successful in terms of participation, then this will be a great experiment in scalability of altcoin networks as well. But that being said, there is a possibility that your funds may not even arrive in your personal wallet until after the event is over. During that transfer time, don’t panic — just check using the transaction ID to make sure that it is going to the right destination address — yours.
5. Factor In Withdrawal Limits
Also keep in mind exchange congestion/withdrawal limits. On many exchanges, if your account is not verified (or at a certain level of verification), your withdrawal may be limited. This roadblock is put in place to observe certain regulatory laws such as anti-money laundering (AML). Furthermore, the exchange itself might not be able to process an overwhelming amount of withdrawal requests at once. Just like in the network congestion precaution (#4), by the time they get to you, the event may already be over.
6. Don’t Move What You Can’t Afford to Lose
With points 4 and 5 in mind, you should also consider pricing risks. If, for example, the prices were to tank during the time when your funds are stuck in transition between wallet addresses, then you will not be able to sell your assets until you can get them back on an exchange again. If you can’t afford that risk, then you should weigh its possibility and decide whether or not this event is right for you.
The Proof of Keys event ultimately has good intentions for the user, because it is meant to ensure that you truly have access to all of the assets that you are promised access to. If users start finding out that they don’t, then it will expose an even larger problem in the space and may prompt more regulation on centralized exchanges. Should you decide to participate, keep in mind the points mentioned in this article to get a better experience out of the event.
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