Banks might control your bank account, but they’re the reason credit cards are a safe, accessible, and interesting way to spend your money electronically. But you don’t get hardware wallet cancellation, fraud protection, and in-store payments with your crypto custodian.
A common, unspoken belief is that these must-have features don’t exist in crypto because they come at the expense of self-custody. Surely, someone can’t protect you from fraud without control of your wallet.
This is actually false.
For background, banks are part of a class of institutions known as “issuers,” which distribute payment cards to users and manage their usage. The bank printed on your credit card not only offers the card, but also:
If crypto had issuers instead of custodians, users could have all of these benefits available from their crypto wallet.
The trick is to offer these benefits without having to give up custody. There is a method called Shamir Secret Sharing that allows crypto wallets to do this.
Adi Shamir is the co-inventor of the famous RSA cryptosystem. In 1979, he wrote a second groundbreaking paper “How to Share a Secret.” Inside was an algorithm to split any secret message into several pieces, which can be handed out to different parties. If at any point some fraction of the parties involved, for example 2 out of 3, joined up to share their pieces, they could use Shamir’s algorithm to recover the secret message.
Shamir Secret Sharing (SSS) has been used as a security mechanism for many purposes, including top-of-the-line credential storage and even guarding PayPal’s master records. How does SSS help us with our issuer problem?
Consider a NFT community who wants to distribute wallets with fraud protection. They could simply hold onto all the private wallet keys, but this would remove users’ freedom to take their funds and leave. It would also be a single point of failure during a cyberattack.
Instead, the community member could simply create their self-custody wallet key on their phone, and split it into three pieces: one for a community manager to hold, and two to give to the user (one stored on their phone’s wallet, and one as a second factor stored off of their phone in a hardware wallet). Then, the user could sign transactions when just 2 of these 3 pieces are used.
Whenever the user initiates a transaction from their hardware wallet using one piece of the key, the community manager can then approve the transaction if they don’t detect fraud by sharing their second piece of the key. In this scenario, the issuer sends the second piece of the key to the phone, which allows the user to reconstruct the key and sign the transaction.
This way, if a user is defrauded or loses their phone, an attacker would, at best, only ever get one-third of a key. This would not be enough to sign a transaction or tamper with finances in any way.
What about when the hardware wallet is lost? In this scenario, the user can then take their phone, complete a quick ID check with their issuer to get the issuer’s share, and then assemble these to move their funds to a new, unattacked address.
This community’s clients are safe from fraud and theft of their phone or hardware wallet. But this seems like it restricts users. Aren’t they still giving up the ability to control their own funds?
The answer is a refreshing no. If an issuer blocks transactions unfairly, or becomes untrustworthy in any way, they can use their phone’s key piece and their hardware wallet key piece to make any transaction. This includes moving to a brand new wallet, away from any jurisdiction of the community. Users are entirely free to opt in and out whenever they please.
Through the power of cryptography like secret sharing, issuers can bring conveniences usually only offered in fiat payments to the crypto world. More importantly, this system champions what crypto does best: giving users the power to make their own decisions.
One question remains. Is there a hardware wallet that can bring issuers into the loop safely and simply?
Radical Semiconductor is making a smartcard hardware wallet called the Radical Card, to help turn any crypto community into an issuer. Our Radical Card system is being built around this exact same secret sharing scheme. Using a card from your community and downloading the Radical Wallet mobile app, you can:
Eventually, Radical Cards will let users pay with crypto at physical stores with complete fraud protection.
If you would like to learn more about how brandable, issuable hardware wallets can help bring these services to communities, reach out to us at firstname.lastname@example.org to request a card demo of our current product, the Radical LiteCard.