Proof of Keys: Have exchanges passed the test?

January 3rd, 2019 marked the tenth anniversary of the Bitcoin genesis block – the first time Bitcoin blessed the world and showed us a new way of transacting with each other. However, the day is now being associated with another interesting movement called Proof of Keys. 

What is Proof of Keys?

Simply put, this initiative is a reminder to Bitcoin owners to see where and how their cryptocurrencies are stored. Proof of Keys calls for participants to take the crypto assets out of cryptocurrency exchanges and third-party services, and secure it in a place ehere they hold the private keys. 

Started by Bitcoin evangelist Trace Mayer, the announcement video calls upon everybody to declare and redeclare their monetary sovereignty on January 3rd to join an annual Proof of Keys Celebration of the Bitcoin Genesis Block by withdrawing all of their bitcoins and other cryptocurrency from trusted third parties to (1) private keys they control using software they run that performs (2) network consensus.

This movement is a way to determine whether the exchanges where many people still store their Bitcoins and other altcoins really have the cryptocurrencies deposited by users. Many crypto exchanges follow fractional-reserve banking style of functioning and this is a way for exchanges to be kept honest. Prominent names like Nick Szabo and Balaji Srinivasan have also lent support to the Proof of Keys movement.

What was expected from participants?

The movement expected users to do the following:

  1. Withdraw their Bitcoin holdings from exchanges and transfer them to a wallet where they are in control of their private keys
  2. Set up Bitcoin full nodes which helps them validate transactions and strengthen the network

Even if setting up a full-time Bitcoin node sounded like a big task, simply withdrawing Bitcoin holdings and securing them on a wallet where you held the private keys was a significant contribution to the movement. Many people even went the full distance and set up a full node of Bitcoin.

Did cryptocurrency exchanges pass the Proof of Keys test?

HitBTC came under a lot of fire for its decision to halt crypto withdrawals prior to the event, sparking wild speculation that the move was a likely result of the Proof of Keys event. John McAfee and Trace Mayer even called foul play on HitBTC and said that HitBTC has failed Proof of Keys. 

The official Proof of Keys website also called out other exchanges such as BitfinexPoloniex and Robinhood, among others, for failing Proof of Keys. However, these may have been one-off occurrences or a temporary glitch which was fixed immediately. There were also some suspicions cast on Coinbase Pro.

What is the impact of Proof of Keys?

Proof of Keys was not expected to have a huge impact on the crypto market, and it was more of a reminder to the users to take control and a warning to exchanges that they cannot get away with mismanagement of funds. Many traders, including ones in India, continue keeping their funds in cryptocurrency exchanges without realising that they are not in complete control of their funds. Many exchanges also exaggerate trading volume numbers and having funds securely stored with them. Mt. Gox anyone?

Proof of Keys will be back again next year, and hopefully, more people will be in control of their own Bitcoins in 2020!

2 Comments

  1. Jason K.
    January 7, 2019 - 7:44 pm

    I can confirm withdrawing problems with Coinbase Pro (GDAX) on Proof of Keys event. They managed to solve the issue they were having only on the 4th of January.

    Reply
    • cryptodost
      January 10, 2019 - 8:22 am

      Yes, the timing seems odd, isn’t it? Although, I doubt that it will be an issue with Coinbase.

      Reply

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