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OKEx Research: How do trading platforms manage digital wallets?

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OKEx publishes digital wallet management scheme and private key management method.

Original title: "OKEx Research: How Exchanges Manage Digital Wallets?"

原文来源： OKEx Research

With the popularity of cryptocurrency, more and more people begin to access and own their own cryptocurrency, which is accompanied by the increasing attention of users to the security of assets. As the core hub of cryptocurrency market, the majority of users have assets in the exchange, so the issue of asset security of the exchange has been concerned by the outside world.

However, given the lack of understanding of the form of asset management in cryptocurrency exchanges, much of the concern is unfounded. To this end, this paper will introduce the specific mode of the exchange management digital wallet, hoping to improve the transparency of the exchange and enhance users' trust in the exchange.

1. Asset management solutions for cryptocurrency exchanges

We know that controlling the cryptocurrency is essentially the private key to storing and managing that asset. In the storage and management of private keys, there are two main objectives:

One is security, which ensures that no one else has access to our encrypted assets.

The second is convenience, which means we can access assets quickly, easily and anywhere.

However, there is a natural contradiction between safety and convenience: a certain level of convenience must be sacrificed for safety; When convenience is met, security is compromised.

Exchanges in the management of cryptographic assets, also faced with the above contradictions. At present, the storage of encrypted assets mainly consists of hot storage and cold storage. Hot storage is a networked wallet (hot wallet) for storage, while cold storage is a wallet (cold wallet) that keeps assets offline. This is similar to the custody of cash assets by banks: a hot wallet is like a banknote box in front of a bank counter, which can high-frequency handle users' demand for charging and withdrawing currency, but with a lower degree of security. Cold wallets are like the underground vaults of banks, isolated from the outside, with a high degree of security, but very inconvenient when filling and withdrawing coins.

Like commercial banks, for convenience and security,OKEx's asset management plan puts 5% of its assets in the hot wallet and 95% in the cold wallet. The hot wallet can meet users' daily demand of charging and withdrawing money, while the cold wallet stored in the vast majority of assets can fully guarantee the security of users' assets. When the assets in the hot wallet are insufficient, the cold wallet will be connected to the Internet in a short time and transferred to the hot wallet. When there are too many assets in the hot wallet, the hot wallet can transfer the assets to the address of the cold wallet. The cold wallet does not need to be on-line during this process.

Figure 1. Trade-offs in target performance for different digital wallets

The above "hot wallet - cold wallet" operation mode ensures the asset security and currency withdrawal demand of users from the large framework. In order to further improve asset safety, whether hot wallet or cold wallet, OKEx has upgraded its management plan with high standards and requirements, specifically as follows:

(1) OKEx Hot Wallet management scheme

In order to ensure the security of the private key of hot wallet, OKEx has made innovations in both trading and private key storage, which are mainly divided into the following three aspects:

First, because hot wallets are always connected to the Internet, they are vulnerable to attacks by hackers. For this reason, OKEx does not use ordinary TCP/IP protocol in the process of transaction transmission, but independently develops a special network communication protocol -- semi-offline signature service. Under this condition, it is almost impossible for the hacker to obtain the private key on the semi-offline machine through network attack.

Secondly, in order to effectively resist offline physical attacks, the semi-offline signature service only stores the private key in memory, so that even if the server is physically attacked, it is difficult for others to obtain the private key data.

Finally, OKEx created its own hot wallet risk control system. All users' recharge and withdrawal requirements need to go through multiple risk management authentication before they are broadcast to blockchain for confirmation, so as to ensure asset security.

Figure 2. Three features of OKEx hot Wallet system

(2) OKEx Cold wallet management scheme

For a cold wallet, there is a small problem with managing its private key: On the one hand, for security reasons, we want to use a different address for collection, so when we transfer cryptocurrency from a hot wallet to a cold wallet, we use a new cold wallet address; On the other hand, since cold wallets do not come online, hot wallets must know the address of the cold wallet in advance.

One possible solution is to have the cold wallet generate a batch of addresses at once and send the address categories to the hot wallet, which then uses them in turn. But this has its drawbacks -- the cold wallet has to be constantly connected to the Internet.

OKEx solves this problem with a layered deterministic wallet. This scheme can let the cold storage side know the unlimited number of addresses, and then know all addresses through a short, one-time exchange. Hierarchical deterministic wallets have the following advantages: First, both parties can generate public/private key sequences, and these public/private keys match each other; Second, when an exchange provides these public keys (addresses) to a hot wallet, there is no connection between these public keys, that is, no one else can determine that these public keys came from the same wallet, thus protecting the security and privacy of the address.

Figure 3. & have spent OKEx hierarchical deterministic wallet diagram

2. OKEx's private key management scheme

(1) Multi-signature technology

Above, we described how OKEx manages user assets through hot and cold wallets. But we also face an important problem: how to keep the private key of the wallet properly. Ordinary users can keep keys in software, write them on a piece of paper, or memorize them with mnemonics. But for the exchanges with huge assets, the private key management mode of ordinary users is not applicable at all, and the most important one -- the exchange's wallet private key must overcome the defect of single point preservation.

In order to avoid the loss of a private key that leads to the loss of address funds and achieve the purpose of risk dispersion, OKEx adopts the "multiple signature" technology. The so-called multi-signature technique is to give control of the address of a wallet to multiple keys, which are kept in different locations and generate signatures separately.

Here's a simple example:

U 2-3 multiple signatures, meaning that three people have the right to sign, and two people's signatures can control the funds in the account;

U 1-2 multiple signatures, meaning that two people can sign, two people have the private key, who can access the money.

On the hot wallet side, OKEx uses 2-3 multi-signature technology, which requires two of the three private key holders to be authorized separately in different high security levels of physical space to enable the semi-offline signature service. In terms of cold wallet, OKEx adopts the 2-2 multi-signature technology, that is, the use of each private key requires double authorization of two people to withdraw money, and at the same time, two people have different points to ensure the security of cold wallet.

(2) Private key backup scheme

In order to further reduce the risk of loss or damage of the secret key, OKEx also performs a backup of the private key while adopting the multi-signature technology:

a) For cold wallets, OKEx currently has two copies, one in a bank safe near OKEx's office and one in a bank safe in an Eastern CITY of the United States. At the same time, the bank safe in different places must be in the hands of two different people, the two people who control the bank safe shall not ride in the same vehicle.

b) For hot wallets, OKEx backs up every private key and stores it in bank safes in the United States, Japan and Singapore.

Figure 4. Exchange digital wallet management framework

OKEx has already established a mature and complete asset management framework, to form the "user - hot - cold wallet wallet" lateral risk control system, as well as "private key/backup - wallet filled coin" vertical management mechanism, at the same time of ensuring fund safety, still can provide fast, safe digital assets of service charge.

Of course, there is still room for improvement in our wallet management. For example, in the past month, some key owners of OKEx cooperated with the investigation, so that a private key of hot wallet could not be authorized. Although OKEx has private key managers have backup mechanism, to ensure that each private key managers in the death or memory loss and other ⻓ period can't reply post conditions can trigger is enabled to backup the private key, but due to the private key manager is not available in the short term, does not appear the original backup mechanism design of the scenes, so cannot enable to backup the private key, have to pause in a short time to raise money.

As mentioned above, the management of digital wallets must balance between "security" and "convenience." The suspension of currency withdrawal in the past period reflects that our wallet management plan is insufficient in the goal of "convenience". We do not take into account the users' demand for currency withdrawal under special circumstances. We apologize for the inconvenience caused. We will improve the private key management mechanism as soon as possible to prevent such situations.