Digital asset custody is the service of holding and managing digital assets on behalf of a client or third-party. The custodian does not own the assets, but they represent the owner and they control the ability to make the assets available for various services or to transfer asset ownership from one party to another, on behalf of their clients.
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In the realm of digital assets, the private key, which is used to generate a verifiable transaction approval signature, provides the authority to transfer ownership from one party to another. As a result, digital asset custody is more about securely storing and managing the use of the private key(s), on behalf of the custodian’s clients, rather than storing the digital assets explicitly.
Multiparty Computation (MPC)
Multiparty Computation (MPC) replaces the concept of a complete key held by one party with a distributed model where multiple parties each hold a share of the key.
MPC can also be designed to allow for a subset of M out of a total of N key shares to create a valid signature, without requiring 100% of the key shares to be available. MPC can also specify some subset of key shares that must be available to replace lost key shares. When implemented with the proper MPC models, these attributes introduce new opportunities for digital asset custodians to innovate and offer more compelling custody services, in addition to improving the security of keys used for custody.
The digital asset custody market has grown an estimated 600% since January 2019 to over $223 billion, according to a January 2022 report from Blockdata. The market is massive and evolving rapidly. There are a wide range of industry terms to describe various custody models and operating modes, but for simplicity, let’s classify them into three primary models:
- Self-Custody: The digital asset owner is in possession of the private key. In the case of MPC, the owner would typically hold all N or at least M out of N key shares.
- Shared-Custody: The custody provider and the digital asset owner are both in possession of shares of a private key, but neither party holds enough shares to execute a transaction without the participation and approval of the other party. In this model, each party holds less than M key shares.
- Full-Custody (or Custody): The digital asset service provider is in possession of the private key, acting on behalf of their client. In this model, the custody provider is in possession of at least M key shares.
Regulation Considerations
Regulation is always a major consideration with any financial related service.
Self-Custody is unregulated. Shared-Custody is unregulated, because the custody service provider does not possess the ability to transfer asset ownership without the explicit approval and collaboration of the digital asset owner. Full-Custody is subject to regulation.
In some cases, a client may prefer the added level of control that Shared-Custody offers. In other cases, regulations in some jurisdictions may not yet be fully defined or are too onerous for the service provider to fully comply. In those cases, the Shared-Custody model enabled by MPC offers added flexibility to navigate regulations and market requirements.
Today, multiple MPC technology and custody solution providers offer MPC-based approaches. Most MPC providers use a simple 2-party MPC model, where the key is never split into more than 2 key shares. In certain use cases, this simplified MPC model is fully sufficient. However, the 2-party MPC model does limit your creative MPC custody and operations capabilities.
Advanced MPC Operations
Having the option for 2, 3 or more key share parties introduces opportunities to provide more advanced MPC operations where appropriate.
For example, while a simple 2 party MPC model may be fine for a hot wallet holding a moderate amount of funds, the flexibility to have more parties involved and MPC quorums is powerful when considering warm wallets and cold storage.
Additionally, opportunities exist to involve third parties, provide recovery key shares to benefactors and other concepts to provide new value-added services.
The turbo-charged performance of Blockdaemon Advanced MPC provides you with these flexibility options and more, while still providing the industry’s highest performance and lowest latency signature generation. And of course Blockdaemon Advanced MPC supports all of your custody options for Full-, Shared-, and Self-Custody.
For more information on this topic, feel free to book a call with the Blockdaemon team today.
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