The recent death of Matthew Mellon highlights one of a number of problems with cryptocurrencies and blockchain technology in general. Matthew Mellon happened to be a billionaire who had made a lot of his fortune by being an early investor in Ripple.
This means that at the time of his death he held more than an estimated $500 million in cryptocurrencies, and, of course, controlled the private keys to his fortune. It seems that these keys have not been located, meaning his fortune may be stuck on the Blockchain for eternity. Unless his family can get hold of the keys, they won’t be able to “inherit” Mellons crypto assets.
This case highlights some important unsolved issues with cryptocurrencies.
Trusted Third Parties
The Blockchain is all about decentralisation and this means the removal of trusted third parties, such as banks, lawyers, and notaries. This greatly empowers the end-users. However, it also places some added responsibilities on the user. Currently, few blockchain enthusiasts understand these responsibilities and are able to meet them.
Let’s think about the cited case of a cryptocurrency holder passing away. Traditionally, the assets are passed on the persons named in the deceased’s will, with laws regulating the process and putting procedures into place to transfer the assets.
However, in the case of crypto assets, the deceased has to have made his own provisions to make sure the assets become available to the correct person. If the private keys are lost, the assets are lost.
Consider an even simpler example: a user loses his private key. In traditional banking, you have to deal with the bank as a trusted third party, but the bank makes sure your assets can be accessed if you mess up. If you lose your bank card or forget you pin, you can walk into a branch with your passport and restore access. The trusted third party provides a safety net, which is absent in the case of cryptocurrencies.
Thus, key management is an important responsibility a user has to fulfil. And history shows, it is difficult to get right. Users can currently choose between writing down the key itself, often represented as a long string in some encoding, or use a list of 12-18 seed words that allows generating the key. This is uncomfortable, easy to get wrong and does not solve the inheritance problem. History shows that even expert users are prone to loosing keys or the inverse: exposing them.
There clearly is a need for better mechanisms and a safety net.
Similarly, trusted third parties provide an arbitrator role that is missing in the automated world of blockchain technology. Consider the case of smart contracts. In traditional contracts, lawyers interpret contracts and in case of disputes, judges can make a decision in one way or another. Inconsistencies and mistakes can be dealt with by expert human interpretation. In this sense, smart contracts are actually less smart. In the absence of expert arbitrators, the code is taken as law and enforced. There are plenty of cases where smart contracts have messed up because of simple programming mistakes.
The problems highlighted in this article are real, but they do not mean we should abandon new technology. However, users must be aware of these issues and act accordingly. In addition, we must come up with new mechanism and safety procedures to somehow provide the safety nets trusted third parties used to provide.