Advancing Bitcoin Security: The Journey from Basic Wallets to Advanced Protocols

Security strategies within the Bitcoin network are in a constant state of progress, and in this exploration, we will assess how these strategies have evolved from simple digital wallets to complex multi-signature mechanisms.

This includes an overview of the latest advances in cryptographic technologies such as Schnorr signatures. In simple terms, we will examine these technologies that help provide the necessary fortifications that act as the foundation behind Bitcoin’s security framework.

We will also consider some of the major security incidents of recent years and the lessons that have been learned. The overall purpose of this piece is to highlight the importance of the Bitcoin community in developing new ways to secure the Bitcoin infrastructure and strengthen blockchain technology – this need is further emphasized by the impending threat of quantum computing…

How Bitcoin Security Has Evolved Over the Years

Since the launch of Bitcoin in 2009, the world of finance and technology has been completely transformed, moving towards ultimate financial freedom as an ambitious but noble goal. As a decentralized cryptocurrency, Bitcoin has grown in value to become the 13th largest currency in the world. However, this value also presented a number of security challenges.

To think that just a decade and a half ago all we could do with Bitcoin was buy a pizza, it’s not hard to see how we got to today’s wallet standards.

Bitcoin initially relied on fairly basic security solutions, such as digital wallets that stored cryptographic keys to facilitate transactions. These wallets, while effective in basic terms, lacked the security needed to prevent malware and cyber security threats, which have rapidly become more sophisticated over the years – requiring innovations to keep Bitcoin safe.

Software wallets

Early digital wallets were basic software that sat on a person’s hard drive, storing private, cryptographic keys that allowed users to access and transfer their Bitcoins.

As the value of Bitcoin increased and cybercriminals became aware of its potential, the need for better security became paramount to prevent widespread hacking and theft. Initially, digital wallets were improved with better encryption and dedicated user interfaces, but this did nothing to stem the tide of a growing number of cyber threats.

Improving and maintaining software wallets has become a somewhat pointless task for developers who have been forced to constantly run API penetration tests, stress tests and various other security exercises to ensure a high level of security. As a result, a new, more practical solution was created.

Hardware wallets

These hardware devices stored private keys offline and nullified many of the threats that were related to software wallets that were connected to the Internet. Hardware wallets came in the form of a small device that connects to a computer via USB – two popular hardware examples were Ledger and Trezor.

Although hardware wallets were offline and required a PIN to access them, and if they were lost, recovering those PINs was a multi-faceted process. This higher level of security increased the popularity of these devices because they were not susceptible to malware attacks, private keys did not leave the device, and transactions were completed in the wallet before being confirmed on the blockchain.

Multi-signature wallets

These advanced wallets required multiple signatures or approvals from multiple users before any transaction could be executed. This drastically reduced the chance of any unauthorized access, and this method was favored by companies and organizations that regularly transacted large-scale transactions with Bitcoin.

To perform a transaction, two or more private keys are required to authorize the activity, similar to written contracts that require multiple signatures. This way, even if a private key has been hacked, the Bitcoin in the wallet cannot be accessed.

Advances/ Signatures Taproot and Schnorr

Taproot was a significant update to the Bitcoin network that was designed to improve scalability and brought a number of improvements. One such improvement was Schnorr signatures, which provided several benefits over the previous Elliptic Curve Digital Signature Algorithm (ECDSA) mechanism, which facilitated the generation and verification of private keys.

The key advantages of Schnorr signatures were that they allowed for smaller signature sizes, provided faster verification times, and offered better protection against certain cyber attacks. Key aggregation was the most significant improvement to Schnorr signatures, which reduced the size of multi-sig private keys so that they took up less space in a block and incurred the same transaction fees as a single-party transaction.

Another important update was the non-malleability feature that prevents cybercriminals from altering a valid signature to allow them to commit malicious activities. Schnorr signatures also improve the privacy of multi-sig wallets, increasing their complexity significantly compared to single signatures.

Preparing for future threats to Bitcoin

The rise of quantum computing poses a significant threat to Bitcoin, as these machines can solve extremely complex problems that standard computers cannot. This may include decryption of cryptographic keys. If this technology becomes more accessible and falls into the hands of cybercriminals, the risk of unauthorized access to all types of wallets becomes significant and could lead to the complete collapse of the cryptocurrency market if there is no solution.

The Bitcoin community has been busy with ongoing research to help develop quantum-resistant cryptographic algorithms.

The hope is that the development of these advanced algorithms will provide sufficient protection against this impressive computing power, but the key challenge is to successfully implement them on the Bitcoin network. This process will be extremely complex, requiring precise orchestration of all users, from developers to miners.

Creating algorithms that not even a quantum computer can crack is a monumental task and is described as post-quantum cryptography. Although the development of these cutting-edge algorithms is still in its early stages, more and more developers are joining the cause, and things are expected to accelerate in the next few years.

High-profile Bitcoin security incidents

Let’s consider two recent Bitcoin security incidents that caused major disruption and helped change the way we think about securing cryptocurrency.

Ronin Network Breach – In March 2022, the highest-value cryptocurrency attack was the Ronin Network breach that powered the wildly popular Axie Infinity blockchain gaming platform. By breaching this network, cybercriminals stole around $625 million worth of cryptocurrency.

North Korean state-sponsored hackers Lazarus Group are believed to be the culprits and are believed to have obtained five of the nine private keys held by transaction validators that were needed to access the Ronin network cross-bridge (a decentralized application that facilitates transactions ).

Binance Exchange Hack – In October 2022, one of the world’s largest cryptocurrency exchanges, Binance, was hacked, with $570 million stolen. Hackers targeted the BSC Token Hub, a cross bridge and exploited a bug in a smart contract to mine Binance coins.

In addition to high-profile cases like this, the countless number of people cybercriminals have targeted is an even bigger concern. Some people may become complacent when it comes to securing their Bitcoin keys, while various platforms may use outdated processes or need to provide more security. For example, if a wallet, platform, or app has a QR code for registration, it can be a significant security flaw, especially since hackers have already targeted features like this.

Conclusion – What did we learn?

These high-profile cybercrime cases show that even the most advanced and prominent cryptocurrency institutions are struggling to keep up with the latest cybercrime techniques. In addition to vast and complex blockchain networks and second-tier third-party applications, the resources required to secure Bitcoin and other cryptocurrencies are substantial.

Although multi-sig wallets offer impressive protection, they are not foolproof. This is why the development of advanced algorithms, such as those created to avoid quantum computing attacks, is key to securing the future of cryptocurrency.

This is a guest post by Kiara Taylor. The opinions expressed are entirely our own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.