Proof of Keys isn’t a new consensus algorithm for blockchain; instead, it’s just an event where people simultaneously pull all of their cryptocurrency out of centralized exchanges. One of the main goals of the event is to make sure that exchanges have the funds that they claim to have. After all, if they don’t, then there’s no guarantee that you actually have the coins you purchased on the exchange. So if it’s already an issue, at least it’s exposed sooner than later.

Does that sound familiar? Because it should. In essence, it’s a bank run. In my previous article, The History of Money, I described what a bank run basically is — one of the most famous bank run events occurred during the Great Depression, when citizens tried to withdraw their money from the banks as quickly as possible out of concern that the banks didn’t have enough money to give back to everyone, even though the banks claimed that they did. Then, well, the Great Depression happened, so… let’s hope history doesn’t repeat itself (just kidding, the Great Depression wasn’t only caused by a bank run — correlation doesn’t equal causation!).

The Nuclear Fallout of Proof of Keys

The Proof of Keys event on January 3rd, 2019 (the event is happening on January 3rd as a celebration of the 10th anniversary of the first Bitcoin block that was mined) will be a bank run except on centralized cryptocurrency exchanges instead of banks. I specify centralized because decentralized exchanges do not hold any assets on behalf of users; instead, users maintain control of their funds.

Rumors are already surging about exchanges like HitBTC supposedly freezing customer accounts prior to the event. These rumors are unconfirmed, but of course celebrities like John McAfee, the Donald Trump of cryptocurrency, loves to spark conspiracy rather than demand the facts, which leading to a blur between truth and inclination.

Despite the differences between how McAfee and I like to approach thinking, he isn’t incorrect to assume that exchanges might be weary of the Proof of Keys event. Exchanges do not like it for obvious reasons.

For one, it can significantly reduce the volume of assets to be traded. Exchanges want volume because it gives people an opportunity to trade more — and making more trades means earning more fees from the transactions. For example, if I want to buy Bitcoin at $3,700 and I went to an exchange but saw that the only offer was at $4,000 because everyone offering between $3,700 and $4,000 withdrew their coins instead, then I probably wouldn’t trade.

Furthermore, exchanges may not see the funds again. After all, if a user wants to trade again, what forces them to move their funds back to the same exchange? Exchanges like Binance have most of the coins a majority of traders are interested in, so users may not see the point in moving it back to a smaller exchange. As a result, exchanges will again see lower trading volume. If you don’t think low volume is too much of a problem, then I’d argue that you just haven’t felt the pain of waiting for two days for one trade to go through. It will certainly impact user experience and drive people to other exchanges.

How Do I Participate (in a smart way)?

If you want to withdraw your cryptocurrency and be a part of the first Proof of Keys event (the intention is to have more in the future), all you need is your own wallet address. This is a wallet address where you own the private key. But certainly take some precaution in order to more effectively participate in the event without compromising your identity or the security of your funds. Here are some tips:

1. Consider Using Temporary Addresses

If you intend to move it back on to the exchange at some point, consider using a temporary address. Exchanges track the addresses associated with accounts; therefore, by withdrawing all your funds to a personal address, you are likely associating that address with your identity. If you want to keep your address anonymous, then don’t withdraw to it from an exchange.

2. Do Not Use Keys You Think Are Compromised

Make absolutely certain that your private key(s) are not compromised. If, for example, you store your private keys in a Microsoft Word document or Google Doc (do not do that, that’s an example of exactly what not to do with your private keys), then chances are it’s not very secure and can easily be located by a simple virus. Proof of Keys is an event that will be a gold-mine for hackers with access to foreign wallets, so you want to be absolutely sure that your wallet’s private key is not compromised. There is no fool-proof way of knowing, unfortunately.

3. Make Sure You Use the Correct Blockchain Address