Proof of Keys

Proof of Keys Day, occurring every January 3rd, is an annual practice wherein bitcoin and crypto investors are encouraged to take control of any funds they keep with third party custodians.

For example, an investor would withdraw any coins held on deposit at a lending platform or online exchange.

Trace Mayer, a Bitcoin educator and podcaster, created Proof of Keys Day as a way to promote the significance of self-custody.

“Every year HODLers celebrate with a test of trust. HODLers test people, exchanges, corporations and other services.” - Trace Mayer

Why is it Called ‘Proof of Keys’?

To take control of the coins held on deposit, they must be transferred to a wallet you control.

The technical way of saying that is: the coins must be transferred to a wallet generated from a private key that you (and only you) know.

This is where the holiday gets its name.

A private key is a secret piece of data that allows you to spend and send your Bitcoin.

It is much like the password to an email account - if you have the password, you can send emails from that account.

If someone else has your password, they can send emails from that account too, and they may be able to access other accounts as well.

Lastpass proof of keys
A breach at Lastpass, a popular password manager, resulted in one of the largest data breaches in history.

Therefore, when someone keeps their coins on a 3rd party platform, like an exchange, that exchange controls the keys.

This means you don’t really know if they have the coins or not. You must trust them.

This is exactly the kind of system bitcoin was intended to prevent - you shouldn’t need to trust anyone with your money.

Why is Proof of Keys Day Important?

In the conventional financial system, banks and other financial institutions act as intermediaries.

They hold your money and determine how it is utilized and who it can be sent to.

However, with Bitcoin and other cryptocurrencies, you can control your own assets.

Proof of Keys day is important because it sets a regularly scheduled “bank run” on custodians.

If a custodian does not have all of the coins it claims to have, this will become obvious as they will not have the necessary funds to cover their withdrawal obligations.

Bitcoin Jobs

In theory, this should incentivize custodians to stay solvent and not gamble with user funds.

However, this only works if enough people participate in Proof of Keys Day.

Usually, very few participate, especially in altcoin communities.

The cost of this non-participation can be seen in a big way almost every single month.

The most recent example would be the collapse of the FTX cryptocurrency exchange.

FTX used customer deposits to fund risky bets made by its partner fund, Alameda Research.

Bitcoin Jobs
The collapse of FTX is yet one more example of the dangers of 3rd party custodians.

Once Alameda had lost those funds, they could not meet customer withdrawal requests, and the whole organization was destroyed almost overnight.

Participation Instructions for Proof of Keys Day

To participate in Proof of Keys Day, you only need to make sure all of the coins you own are held in wallets you control.

This can be accomplished as easily as transferring your Bitcoin from an exchange or wallet provider to a self-custodial wallet, such as a hardware wallet or a software wallet.