One of the main reasons that certain individuals don't like the idea of using Bitcoin is that they're afraid a hacker will be able to steal their bitcoins from their desktop computer. Although a person can do everything in their power to make sure their computer is not compromised, the reality is that there's no such thing as 100% security. This poses a serious issue for a digital currency that uses irreversible transactions as one of its core principles. Bitcoin Authenticator is a new security plugin for Bitcoin wallets that will add two-factor authentication directly into the protocol. The feature takes advantage of multi-signature transactions to make sure that a hacker cannot do anything with a Bitcoin wallet on a compromised computer.
How Does Bitcoin Authenticator Work?
[dropcap size=small]T[/dropcap]he way this new security enhancement for Bitcoin works is actually quite simple. Most Bitcoin users understand that the only way to spend bitcoins is by signing a message with the private key associated with a public Bitcoin address. The private key is essentially the piece of data that holds the true value of any amount of bitcoins in a particular address. By using Bitcoin Authenticator, that private key is essentially broken up onto two separate devices. Instead of signing Bitcoin transactions with a desktop wallet, a user is now required to sign the transaction with keys from both a desktop computer and a mobile device in order to execute a transaction. This means that a user must have access to the private keys on two separate devices for their bitcoins to be sent to another address. A hacker would have to compromise both devices to steal a user's bitcoins.
A More Secure Hot Wallet
When most people think about advancements in Bitcoin security, they usually think about different forms of cold storage, such as the TREZOR hardware wallet, before anything else. Chris Pacia, the developer behind Bitcoin Authenticator, views his project as a security enhancement for hot wallets, but he also admitted that it could be used for cold storage in the future. Here's what Chris had to say about the possibility of using Bitcoin Authenticator with offline devices:
I haven't really thought of it like that. My main goal was to help create a more secure hot wallet. Cold storage will still remain a better solution for securing large amounts of coins. In that sense a hardware wallet is probably a step up from this app I've created, but the primary issue with hardware wallets is cost. We're already asking people to use this crazy new Internet money. Telling them they have to spend a couple hundred dollars on a device to prevent their coins from getting stolen is bound to turn some people off. I suspect hardware wallets will be used primarily by power users. This is something people can use for free.
It would be interesting to see Bitcoin Authenticator used with some kind of offline device due to the added level of security that comes with a computer that's never been connected to the Internet, but that enhanced safety does come with the added costs mentioned by Chris Pacia. Android smartphones can be found for as low as $25 these days, but those prices are likely to continue to decline over the long term. Convenience also becomes an issue when signing transactions with offline devices, so we could still be searching for a better way to bridge the gap between security and usability at this point in time. Having said that, features built on top of multi-signature transactions, such as Bitcoin Authenticator, definitely address many of the security concerns related to hot wallets.
Enhanced Banking with Bitcoin
The Bitcoin Authenticator project has huge implications when it comes to enhanced Bitcoin wallet security and increased mainstream adoption. Although most Bitcoin enthusiasts don't like the idea of using a bank, there are plenty of people out there who like the added security of third party services. Many banks already put questionable transactions on hold for their customers before they're able to get some kind of verification from the individual behind the transaction. There may very well be a market for "Bitcoin banks" that will basically act as a co-signer on the transactions originating in a customer's multi-sig address. Although low-value transactions could be sent through automatically, some people may like the idea of having a third party check their high-value transactions for "unusual activity". This would actually be an improvement over the current banking system due to the fact that the bank would not be able to process a transaction without a signature from a customer's private keys. It essentially brings some of the enhanced security measures from the banking system to Bitcoin without requiring a large amount of trust in a third party.
Photo via Bohman.