Peter Schiff's recent corrupted Bitcoin wallet

You can read Peter's tweet here.

Peter Schiff claims his wallet got corrupted, and it forgot his password. 4000 people have liked this so far and counting. Some have offered to help, and many have snootily laughed at him and said "Not your keys, not your coins."

On Bitcoin, nobody can have much like for Schiff. He has spent years trying to bear Bitcoin down to zero - championing every collapse. It is not surprising many people are deriding Peter on Social Media.

What irks most involved in crypto, is that most believe in hard money. They advocate using gold backing to reduce the amount of central banking's wanton money printing. Schiff's main tenet is that Bitcoin can never become real money - am not sure it has to.

Wallets and corruption

It has been a while since I read the Bitcoin Protocol, and have read different blockchain whitepapers, plus taken a peek at different bits of code. So I can't claim to be an expert on wallets, but I want to put across my explanation on how people could genuinely get locked out of their cryptocurrency. If anybody wants to correct me or pass on more information, please do.

Before going any further - good blockchains, and good reputed wallets will not make the cavalier mistakes which bad wallet creators may have enacted.

What is a cryptocurrency wallet?

A cryptocurrency wallet, isn't really a wallet at all, it is a collection of the following;

  • A private key.
  • One or more public keys.
  • Code which performs actions like;
    • Making payments.
    • Monitoring the blockchain to verify payment status.
    • More advanced functionality like multi-signature payments. Imagine a team all contributing money towards a new sports kit.

In most ways, a wallet is not a wallet at all. It is just a term used to try and give some mental connection to the existing fiat financial system. A bit like using Coin in the name BitCoin.

The most critical, and most contentious feature of cryptocurrencies is the private key. The private key is nothing more than a collection of numbers. These numbers are basically, a byte array and look something like this;

[1,14,22,11,63...] A byte represents a character in an extended alphabet which computers recognise through what are known as encodings. Encodings are systems for classifying notation. This is one of those things you live and breathe, or you learn about a few times and forget about it.

What is the significance of the passphrase for wallets?

A list of 32 numbers in a row is not the most natural way for humans to remember passwords. Perhaps you know 32 people's birthdays and can sort their names alphabetically, to remember the numbers - but it is pretty tough going. To simplify this, wallet makers have created a mapping of words to numbers. Typically, this is 12 words with certain wallets.

  • 1 = Dog
  • 2 = Cat
  • 3 = Paris
  • 4 = Teapot
  • ...

This is where it becomes critical. If a wallet maker doesn't publish this mapping of words to bytes, and the wallet stops working, my understanding is - it is "Goodnight Vienna".

It is probable that most forks of Bitcoin uses the same protocol for seed phrases. 

A recent incident with my Blackcoin wallet

Blackcoin was an interesting project several years ago. It offered proof of stake and had Smart Contract wrappers with BitHalo, along with Bitcoin. Proof of stake is a bit like earning interest on your deposit.

So I acquired some Blackcoin, and had my wallet running mining coins. The coin has dropped a lot in value to the point of being almost worthless.

It is obvious why - no marketing, limited branding. It fails to be understood why developers spend so much time on a product and never market it.

Anyway, the wallet corrupted recently. It stopped connecting to the network. I figured that the Nodes had switched DNS. Effectively - all the coins were lost. 

I downloaded the blackmore wallet, and restored an older backup of the wallet, and magically - it worked. By chance, the same seed phrase generation was used by this other wallet. I guess, if is hadn't worked, I may have been able to fork the original Blackoin code, figure out which dns servers were now used and recompiled the C++ app. Would have been hard work as I haven't worked with C++, but I think it is fairly similar in syntax to C#.

The emperor has no clothes?

There are many scenarios to consider with different cryptocurrencies.

  • As people die or forget their passwords - the cryptocurrency monetary base reduces. What would happen if loads of priced in dead coins suddenly re-entered the market?
  • Can some wallet creators be trusted - no?
  • How many people has the skill to verify which wallets are good or bad? In a world without regulation and government - who is to be trusted? The Market maybe?
  • Do we need custody solutions to help manage keys of people less capable to keep a track of their coins? Probably - but can these parties be trusted? The whole point of cryptocurrency is to take responsibility for your own money with no clearing counterparty.
  • Would it be better if multi-signature wallets were set up to reduce the risk of coins becoming dead?

Bigger thoughts on cryptocurrency and the question around identity

Schiff's problem was he didn't take any real care on maintaining his keys. That he used Bitcoin gives him a far stronger chance of recovering his Bitcoin It seems his wallet maker has already offered to help him. If he does recover his coins - the first thing he needs to do is to get a proper wallet.

Many will claim this shows Bitcoin to be a failure. What cryptocurrency has done is to put identity, trust, and ownership as more central to our thoughts. GDPR sounds like it is the solution, but blockchain based cryptography seems a better protocol for ensuring privacy and trust. (Bitcoin isn't a privacy coin).

At the heart of this discussion is this. Governments and banks have been involved in money printing to the degree that what you think is real and measurable is not. Gold is physical - no doubt, but a cross-border decentralised record of account solves so many problems. This is why - Schiff's nonsense should be put to rest in 2020. The guy has so much good content and information, why does he need to keep bashing Bitcoin when it is pushing the same hard-money narrative he is pushing for?

At the same time, those involved in cryptocurrency shouldn't be jumping to deride anybody who makes a mistake. How is that encouraging people to take a leap of faith into a new system?

Follow up 21 Jan 2020

It appears that my trust in Schiff's incompetence with technology was misplaced - he was more incompetent than it first seemed. He simply forgot his password and never retained the passphrase. The key aim of online wallets is they don't want to know your password or passphrase. You pass them the details and they simply apply them against their algorithm.

Another major failing, is Schiff didn't move any cryptocurrency to what is known as cold storage - offline.

What bothers me about this is for Peter to be an authority on why Bitcoin doesn't work as money - he really should understand it quite intimately. There is no need to be a cryptographic guru or technological genius, but at least get the fundamentals. A key intention of Bitcoin was and still is individual sovereignty. Unfortunately, this latest escapade elevates Schiff to drama queen status in the world of Bitcoin.

Obviously, if his company manages to recover his passphrase, then his Bitcoin was never truly secure which is a bigger issue in trusting online wallets. Maybe that was his issue. 

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