Proof of Keys day is on January 3rd. 🗝️

This is the anniversary of when the first Bitcoin block – known as the ‘genesis block’ – was mined by Satoshi Nakamoto. It is the block that will forever be inscribed with these famous words:

“Chancellor on brink of second bailout for banks”.

Left: Front page of The Times – Right: The Bitcoin Genesis Block

On the 10th anniversary of the launch of the Bitcoin network, Bitcoiners began the tradition of mass withdrawing their coins from custodial services all over the world and into their own private wallets. This event was named Proof of Keys. It was initiated by Trace Mayer, a fallen Bitcoin hero, who, today, is probably lost in Mimble-Wimble-shitcoinery (unless he performed one of the greatest ‘boating accident’ exits of all time).

Of course, this is not an issue for Bitcoin. Bitcoin is decentralised and doesn’t need individuals; ‘We are all Satoshi’.

What is the point of Proof of Keys Day?

Fractional Reserve Impairs Scarcity

One of the biggest value propositions of Bitcoin is its absolute digital scarcity of 21 million coins. This is the limit of real coins, not coins that an exchange sells you and tells you that you own. 

Let’s say you have x1 bitcoin in your exchange wallet – that is a promise that the exchange is holding x1 bitcoin on your behalf. Think of it like owning a bar of gold and leaving it in a bank, never seeing it, but being able to log in to your online account and seeing a photograph of the bar of gold you supposedly own. 

This begs the question; how many other people are being shown the same photograph?

We know fractional reserves exist in the banking sector, whereby you deposit a dollar in the bank and the bank can lend out 90 cents of that dollar while still giving you access to your deposited dollar at all times. Basically, this is a form of legalised deceit (think, shitcoins) and it all works perfectly fine, until there is a bank run…

A bank run occurs when many bank clients try to withdraw their money from the bank at the same time, because they believe the bank may cease to function in the near future. 

Proof of Keys day is an intentional bank run on all Bitcoin exchanges to determine and prove that the exchange possesses the Bitcoins they say they do. Why? There have been many exchanges in the past who have failed to fulfil this promise, and some were even revealed by this annual Proof of Keys event. It’s entirely possible that while some fractional reserve on Bitcoin exchanges does exist, the annual risk posed by an organised day like Proof of Keys is a relatively effective check.

In addition to ensuring scarcity and honesty amongst exchanges, the Proof of Keys campaign creates awareness amongst Bitcoiners about the trouble of fractional reserve. It also increases a newly minted Bitcoiner’s knowledge about reasons why it is important to hold, own, and manage your Bitcoin..

Not Your Keys, Not Your Cheese 🚫🔑🧀

If you’ve been around Bitcoin long enough, you will have heard the meme – ‘not your keys, not your coins’. It comes from a famous phrase first uttered by long-time Bitcoin evangelist, Andreas Antonopoulos, who originally said; “Your keys, your Bitcoin. Not your keys, not your Bitcoin”. Over the years, this famous phrase has morphed into “not your keys, not your coins (or, your corn),” and “not your keys, not your cheese”. 

No, it doesn’t make sense, but it rhymes, so just go with it.

Every Bitcoin claim has a private key associated with it. If you don’t have the key, someone else will (or it is lost). Whoever does have the key also has the power to use it to spend any Bitcoin that is associated with the key.

Knowledge Is Ownership. Everything else is an IOU.

Bitcoin is permission-less; you don’t need to ask anyone to use it. You don’t need to show ID to prove who you are, or where the funds came from. Thus, if you hold your own private keys you decide – 24 hours a day, 365 days a year – whether or not you want to spend, donate, or give your sats away to whomever you like. Bitcoin is a bearer instrument of extreme ownership and therefore demands ultimate responsibility.

Responsibility

If you hold your own keys you are responsible for your own Bitcoin. You and no one else. If you lose your keys, you lose your Bitcoin. This is a scary thought for some people who don’t want to take this responsibility. 

However, the alternatives are: 

  • Trusting an otherwise unknown and unregulated company to hold your Bitcoin for you, such as on an unregulated exchange. Some have been hacked throughout the years… vale Mt. Gox. Any exchange holding coins on their customers’ behalf could be a potential honeypot for attracting hackers. 
  • Trusting a regulated company to hold your coins. If so, you give up your privacy (thanks to KYC/AML) in addition to giving up your coins. This exposes you to regulation risk: For instance, what if the government decides to limit withdrawals from exchanges? Your sats become trapped in the fiat system and will become worthless compared to any sats existing outside this legacy structure. [ED: That being said, Amber is supremely focused on safely securing your scarce, precious sats in institutional grade collaborative custody with help from the team at Unchained Capital].
  • The best thing you can do is to learn how to self-custody, to hold your keys and your coins safely. The time and money you invest into learning how to do this is well worth it for the peace of mind it brings.

There are many resources online – some more trustworthy than others – but for people who need or want help and guidance, I offer this service through my mentorship program.

Summary

The entire purpose of Proof of Keys is to keep the spectre of fractional reserve in check and to increase the awareness about the benefits of self-custody and being self-sovereign. This is an extremely important and advantageous feature of Bitcoin. Despite his latent shit-coinery, Proof of Keys really is a great initiative by Trace Mayer, and for that he deserves our gratitude.


[ED: Amber takes Bitcoin custody very seriously. It’s why we store the majority of your stack in cold storage collaborative custody wallets, with the help of the Bitcoin-only crew at Unchained Capital. You can read more about this process here.

Rest assured that your sats are safe with us, until you are ready to withdraw them to your own self-custody cold storage wallet, say, on a day like Proof of Keys day on January 3rd]. 🗝️