Anand Sinha
3min read
Feb 15, 2024
The importance of secure and convenient storage of funds in the crypto economy cannot be underestimated. Though security systems have grown more advanced over the years, the threat of vulnerable networks falling prey to incessant exploits remains ever.
It is in the context of DeFi security that multi-party computation (MPC) wallets have emerged as viable options for users in the Web3 economy.
Private and secure, MPC wallets are now being offered by most of the leading trading exchanges to their users. What makes them popular are their efficiency and impregnability.
As per a report, users in the crypto market lost nearly $2 billion to scams, rug pulls and hacks in 2023. The figure was nearly double in 2022. The reason the amount dropped last year was attributed to improved security protocols.
The role of MPC wallets in enhancing the security of DeFi networks is worth scrutiny.
Today, we will dig deeper into the innovative infrastructure of MPC wallets, their pros and cons, and if they are indispensable to a secure DeFi economy.
Multi-party computation (MPC) is a cryptographic technology protocol that allows multiple parties to access data and execute computations without disclosing any of these details to each other.
The concept of the technology has been around since 1980s, but it was only recently that it got implemented in the DeFi wallet services.
Recommended Read: Understanding Crypto Custody Solutions
Existing in the crypto ecosystem, MPC wallets secure users’ funds by storing and managing them using a unique MPC technology.
The private keys of an MPC wallet are divided into multiple parts known as "shares" using secret codes so that crypto assets held by users can be handled safely.
These “shares” of the keys are distributed among multiple parties who possess an MPC wallet.
A transaction is authorised to be executed once a required threshold of shares in achieved. Neither all nor none of the shares are required to validate a transaction.
Since no single party possesses the wallet, it makes it secure and impenetrable. It leads to near impossibility of a single point of failure, making an MPC wallet quite secure.
MPC wallets are a relatively modern innovation in the DeFi ecosystem, compared to regular wallets.
Let's compare the importance of MPC wallets in the context of the continuing evolution of Web3 wallets as the role of secure network infrastructure gets more crucial now.
Single-key wallets, as is obvious, have one private key that can be easily forgotten or hacked. Multi-signature (multisig) wallets require multiple signatures from different devices or parties which is a complex and longer process.
Meanwhile, hardware wallets exist physically which makes them vulnerable to damage. In contrast, MPC wallets have no single point of failure. They make the access to the funds or data faster, private, secure, and economical.
It is important for us to understand that a user must choose a wallet as per their requirements. No wallet is superior to others, and oftentimes, a wallet’s utility is best understood in terms of its use cases.
Most retail users don’t use MPC wallets although some high net-worth individuals (HNIs) do. Such wallets are usually used by institutions or large groups.
Note that no wallet is perfect or ideal as each has its pros and cons. Though as far as MPC wallets are concerned, the pros outweigh the cons.
Financial institutions are increasingly adopting MPC wallets due to the enhanced security infrastructure and multi-party support they offer.
Knowing the use cases of a wallet in terms of functionality, security, and cost before using one is most crucial. Compare different MPC wallets available to you and choose one based on your requirements.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.