On January 3, the anniversary of the first Bitcoin Block, Bitcoiners perform the ritual of withdrawing our bitcoin from custodial services to our own private wallets. This event was created by the infamous Trace Mayer, who is now a fallen hero. (He either was lost to shitcoinery, or performed the greatest ever “boating accident” exit for OPSEC purposes – I don’t think we’ll ever know.)
What the purpose of Proof of Keys Day is, is the subject of this article.
#1: Don’t trust the exchange
For many people, the easiest way to store bitcoin will be with a custodian — their exchange. Most beginners choose this without realizing what they are choosing, and without realizing that there is in fact a superior alternative.
For example, many people might sign up to an exchange, such as Bitaroo (not an advertisement, it’s just the exchange I use and recommend), transfer money from their bank account to the exchange, purchase bitcoin, and then keep an account with Bitaroo which displays their bitcoin balance. This is the easiest way. To access the bitcoin they simply log-in to their Bitaroo Account. They must keep the login password safe, but if it is lost, it may be retrievable with a lost-password service provided by Bitaroo.
While this is easy and convenient, and the default solution for many, most will not realise that they do not actually hold their bitcoin — Bitaroo does. And to move their bitcoin, they need Bitaroo’s permission.
Usually that’s not a problem, but what if Bitaroo is down for maintenance? Or worse, what if they go bust? What if the exchange gets hacked? — bitcoin goes bye-bye. What if the user posts something negative about their government and that government forces Bitaroo to freeze their funds? What if a future government does? What if Bitcoin gets banned? Bitcoin is not confiscatable, UNLESS someone else holds your bitcoin. Then it’s VERY confiscatable.
#2: 21 million cap and Fractional Reserves
If all Bitcoin was held by custodians, and what all users were ever given was an account with a number balance printed in their Account page, then ANY number can theoretically be written in their account, completely disconnected from the reality of how much bitcoin exists, at the discretion of the custodian.
Eg, PayPal is allowing users to buy bitcoin, FROM THEM, and no withdrawal will be possible, and no payment to anyone else will be possible. Then, how do you know you own the bitcoin you paid for? How do you know they don’t have 500,000 bitcoin for example (or zero!), but sold 2 million “bitcoin” to users? There would then be 1.5 million imaginary bitcoin in addition to the 21 million supply cap. If the exchanges don’t have to be accountable to their users, they can report to the public their holdings of any quantity they want. This is similar to how the gold price is said to be manipulated. There are imaginary units of gold sold as paper, inflating the true supply, and suppressing the price.
# 3: Enforce rules of Bitcoin
When you run your own Bitcoin Node, you can verify a payment to you is real bitcoin, that follows the rules you subscribe to. If it is a coin that is part of a blockchain that has allowed the supply cap to increase, your node can reject that coin. Your wallet that talks to your node will not show payment received. See here for more information on why to run a node.
However, if you have an exchange account only, the exchange can run any rules of Bitcoin it chooses. They may one day have an incentive to cooperate with other exchanges, and change the rules of Bitcoin to suit them. Then corporations will be in charge, not the people.
#4: Surveillance, KYC, Coinjoin
If you hold your own Bitcoin, then you are free to practice good privacy habits such as coinjoin, PayJoin, UTXO management, separation of KYC and KYC free UTXOs etc. This is not possible with coins on an exchange. All your financial dealings will be known to the exchange/custodian. Basics of Coinjoin.
Bitcoin on the base layer can not scale for high volume small payments, and that’s OK. Lightning is the solution for scaling, but to use lightning, you need to open payment channels with other peers. You can’t do this if your coins are on an exchange. It is likely that there will be custodial OPTIONS to make this process easy, as lightning is still not consumer ready, but the choice to DIY is there for the power user.
#6: Peer to Peer
Bitcoin allows payment from one person to another, with no middleman taking a cut or permitting the transaction. It is a replacement for cash, but digital. Currently all digital payments need a central coordinator. Bitcoin eliminates the central authority. Coins on an exchange behave like any digital medium of exchange, and forgoes all the advantages of Bitcoin.
#7: Trapped Bitcoin
There is a possibility that Bitcoin on the exchanges may, by legislation, not be permitted to be spent anywhere, but to another “approved” exchange account only. These bitcoin then become trapped in the KYC system, and lose all their desirable properties, and value. There will be a two tier market.
- Coins on the exchange that will trend to worthlessness
- Coins outside the exchange, in private hands, that will retain and increase in value.
Luckily, most bitcoin are outside exchanges already.
What POKs Day does
The point of Proof of Keys Day is twofold, in my view. The first is to keep exchanges in check. Some may be running on fractional reserve, and my not have the bitcoin in their possession that they say they have. When everyone withdraws their bitcoin on the same day, then they become exposed, potentially collapsing. Similar to a traditional bank run. The fact that there is this threat, reduces the chance that exchanges will take this risk.
Another is to increase awareness for users, especially new ones, to self custody, and experience the true benefits and properties of Bitcoin.
Even though Trace Mayer is no longer our hero, POKs Day is still important. Withdraw you bitcoin and hold your own private keys.