--:-- Zoran: Welcome to the A16Z podcast. I'm Zoran. Today's episode is all about crypto security—new mindsets and strategies for storing crypto assets safely while allowing holders control and access.
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--:-- Zoran: As a reminder, none of this should be taken as investment advice. Please see A16Z.com/disclosures for more important information. We've covered security trends more broadly in our content, which you can find at A16Z.com/security, as well as crypto-related trends, including NFTs and the creator and ownership economies. You can find all of that at A16Z.com/NFTs.
--:-- Zoran: But as more people enter crypto lately—thanks to the boom in NFTs, decentralized finance, and much more—we share specific best practices and options for securing crypto, as well as discussing how it all fits into the next evolution of the internet: Web3.
--:-- Zoran: Our expert today is A16Z crypto data scientist Eddie Lazarin. We cover practical approaches ranging from passwords to crypto wallets and what users can do, the evolution of crypto briefly, and the big picture mindset shifts involved here as well.
--:-- Zoran: We quickly begin with the practical shift crypto security represents compared to how people interact with traditional financial institutions.
--:-- Eddie Lazarin: When you have a relationship with a bank or some Web2 application, they're the ones who fundamentally control the terms of engagement. The fact that they have total control is proved by their ability to reset your password or change the rules on the fly.
--:-- Eddie Lazarin: With crypto security, you can remove the relationship with an intermediary and have a direct relationship with a protocol. It's simultaneously incredible and terrifying. It's incredible because it means you can truly own the asset. No one can revoke or interfere with your relationship with those tokens or NFTs. It's terrifying because you're in charge of controlling the secrets that guard your access to that asset.
--:-- Eddie Lazarin: Of course, there's cool software and developments to make this easier and less daunting. But because we're still in the early days, it requires a shift in mindset.
--:-- Zoran: When people think about crypto, they often think about hacks. But then you hear things like, "The Bitcoin network has never been hacked," or "Ethereum has never been hacked." What are people talking about when they say "crypto hacks"?
--:-- Eddie Lazarin: It's an interesting point because it shows how many confusing myths there are about security. It's not anybody's fault—it's just that the terms are overloaded.
--:-- Eddie Lazarin: When someone on Twitter pretends to be Joe Biden and asks for your Bitcoin, that's a Bitcoin hack. Bitcoin and Ethereum have never been hacked in the sense that no one has tricked the network into giving them someone else's crypto. But there are similar things that do happen.
--:-- Eddie Lazarin: The analogy is like a bank. No one has broken into the bank's vault, but there have been cases where people have tricked customers into providing their private information, fooling the bank into letting them take stuff. The vault remains secure, but the human beings have been tricked.
--:-- Zoran: Give us a sense of some of the ways people can be tricked.
--:-- Eddie Lazarin: One common attack method is when people seek support for a specific DApp or wallet. Attackers intervene in those support channels, pretending to help, and ask for your seed phrase during the debugging process. Of course, you should never send someone your seed phrase under any circumstances.
--:-- Eddie Lazarin: Another example is with NFT drops. You go to a site to mint or buy an NFT, and when your crypto wallet pops up to approve a transaction, you may not know what you're signing. It's possible to approve something nefarious, like transferring funds or granting permissions to an adversary.
--:-- Eddie Lazarin: If you're signing a transaction on a trusted venue like OpenSea or Matcha, you're probably safe. But if it's a brand-new NFT drop that just appeared, you should think twice or inspect the transaction details to ensure you know what you're signing.
--:-- Zoran: The Bitcoin White Paper was in 2009, right? How has the way people think about security changed in crypto over the last 12 years?
--:-- Eddie Lazarin: In the earliest days, people stored their Bitcoin private keys in Notepad on their desktop. It wasn't serious then. Now, we've come a long way. Mnemonic seed phrases were a huge improvement because they're easier to store and remember.
--:-- Eddie Lazarin: A seed phrase is a sequence of 12 or 24 words that encode your private key. It's portable—you can import it into different wallet software. For example, you can take a seed phrase from MetaMask and import it into Rainbow Wallet.
--:-- Zoran: What's a common myth about this topic? What don't enough people know?
--:-- Eddie Lazarin: People may not understand that the seed phrase is your password. It's not just related to your private key—it's the representation of it. And it's portable. Many people don't know that.
--:-- Zoran: Let's talk about security mindsets. Seed phrases are an improvement over 512-bit encryption, but we don't want to rely on memory alone. How are people currently thinking about securing these seed phrases, and how is that evolving?
--:-- Eddie Lazarin: It's unfortunate that seed phrases are often stored on paper and hidden. People use things like crypto steel—metal devices that encode the seed phrase. They're durable and can last a thousand years.
--:-- Eddie Lazarin: The future of storing private keys probably involves multi-party computation or Shamir's secret sharing. This way, even if you lose your piece, you can recover the funds.
--:-- Zoran: When we think about mainstream adoption for crypto, it seems inevitable that most people won't want to think much about security. They'll want it to be more like banks. Where do you think that's going? How will security evolve?
--:-- Eddie Lazarin: For people who want a bank-like experience, holding crypto in an exchange is an option. Exchanges will do a high-quality job holding your assets, but it limits your ability to use them for DeFi or NFTs.
--:-- Eddie Lazarin: If you hold Ethereum on an exchange, you can't do cool DeFi stuff. But exchanges allow you to recover your password traditionally. Worst case, you can send documents and regain access.
--:-- Zoran: What should someone do if they want control but don't want to do a bunch of DeFi stuff or get involved in DAOs or NFTs? They just want the freedom to move money around and trade.
--:-- Eddie Lazarin: The key question is where the private keys are held. If you install MetaMask in your Chrome browser, MetaMask holds the key. You generated a seed phrase, hopefully stored it securely.
--:-- Eddie Lazarin: If you want to move the private key offline, you could get a hardware wallet. When you generate the seed phrase, you store it securely. The hardware wallet holds the key, and it's not connected to the internet.
--:-- Zoran: Even with hardware wallets, you still have to connect them to your computer. What's beyond that in terms of security?
--:-- Eddie Lazarin: You could generate a seed phrase or private key offline, calculate the public key, and never have it touch a computer. That's a cold wallet. The idea is that it's never been online.
--:-- Eddie Lazarin: When you want to send funds to that public key, you just prove you control the private key. It's kind of weird, but there's no sense in which you have to be online.
--:-- Zoran: Is this required for everyone or just a small subset doing advanced things?
--:-- Eddie Lazarin: It depends on what you're trying to do. The secure enclave on modern smartphones is high quality. If you install a good crypto wallet, you can generally trust it. But you still need to back up the private key if the device is destroyed.
--:-- Eddie Lazarin: Some wallets allow you to encrypt and upload the private key to iCloud or Google Drive. It varies by wallet provider. But ultimately, the seed phrase is the critical thing to store.
--:-- Zoran: What's the one thing people should be doing to protect themselves?
--:-- Eddie Lazarin: First, I strongly recommend a hardware wallet. They're convenient and high quality. Never provide your seed phrase to anyone else under any circumstances.
--:-- Eddie Lazarin: Rely more on your phone than your browser. There are nice methods to connect to DApps by scanning a QR code with your phone. A phone is a much more secure computing environment than a laptop.
--:-- Zoran: For widespread adoption, interfaces will have to become more intuitive. But does that mean less control for the individual and more for third parties?
--:-- Eddie Lazarin: No, it shouldn't be alarming. A lot of crypto features will have to be abstracted, but the underlying assets and data won't be controlled by the interface. The interface just provides a high-quality user experience.
--:-- Eddie Lazarin: The secure enclave on modern smartphones is really high quality. If you install a good crypto wallet, you can generally trust it. But you still need to back up the private key if the device is destroyed.
--:-- Eddie Lazarin: Some wallets allow you to encrypt and upload the private key to iCloud or Google Drive. It varies by wallet provider. But ultimately, the seed phrase is the critical thing to store.
--:-- Zoran: What's the one thing people should be doing or there are two or three things people should be doing to protect themselves?
--:-- Eddie Lazarin: First, I strongly recommend a hardware wallet. They're very convenient. Never, ever provide your seed phrase to anyone else. Never send your seed phrase to anyone under any circumstances.
--:-- Eddie Lazarin: Another thing is to generally rely more on your phone than your browser. There are really nice methods to connect to DApps by scanning a QR code, wallet connect or something like that, to connect with the DApp even if it's on your laptop, and send signatures authenticated by your phone.
--:-- Zoran: When we think about all these issues in relation to the wider adoption of crypto and DeFi, for widespread adoption, interfaces will probably have to become more intuitive for people, more user-friendly. It's almost like the crypto part of it has to be abstracted to make it truly accessible to a large number of people. But what would doing that mean? Would that fundamentally be anti-crypto in that it means less control for the individual and more control for third parties? Help me think through that in terms of wider adoption.
--:-- Eddie Lazarin: Yeah, you're completely right that a lot of the crypto features will have to be abstracted. And that shouldn't be alarming to anyone who follows trends in technology because that's always been the norm about everything. No one knows how credit cards work underneath the hood. No one knows how JavaScript powers front-end interfaces and browsers. No one knows how DNS or the mail protocol works unless you're an engineer working on that thing.
--:-- Eddie Lazarin: Like a lot of these things are abstracted. But think about when people access Facebook—there's only a few ways. There's like the Facebook client, the app that you download on your phone, or you can access it through the web browser. But fundamentally, if you want to read and write data from Facebook, you need to use a client that Facebook controls.
--:-- Eddie Lazarin: To bring this analogy back to crypto, even if people end up having the crypto experience abstracted away and end up with this really straightforward interface, that interface still does not control the underlying information and the underlying data and the underlying assets. And what that means is that they have to focus on delivering purely a high-quality user experience.
--:-- Eddie Lazarin: That is a fundamentally different relationship with the end-user than if the data is controlled by them. And in fact, I would even go so far as to say it will unlock radically superior interfaces. You expand the space of people who can try their shot at an interface infinitely from one to an arbitrary number, right?
--:-- Eddie Lazarin: Now anyone can make that interface. The interfaces on crypto-based applications will end up being better because of the interoperability, not as good. Really, it feels like what we're talking about here is a very different security paradigm, right? It's more personal control along with more personal responsibility. And it's a completely different relationship to one's assets and data than we're used to.
--:-- Zoran: It's like the transition from Web2 to Web3 kind of happening in real-time, right? One of the most like Web3 moments for me is going to my parents' computer in Miami, which is not logged into any of my accounts. So all I had to do was open up the browser, click Wallet Connect, and then scan with my phone, scan the QR code from my phone wallet on the browser on their desktop. And I'm immediately logged in. And it's showing me all of my assets. I didn't have to remember a password. I didn't have to do some CAPTCHA. I'm immediately shown all of my things. Not by signing a transaction, but just by basically linking my public key on my phone with that DApp on my parents' browser. That to me is incredible because it just shows the portability of things and how we are truly in a different security paradigm.
--:-- Eddie Lazarin: It's kind of absurd, the system that we've created today. But how do we know it's all going to work? Like, how do we know that just because you have this seed phrase that you can carry around in the world with you, that it's going to, through all these different interfaces and all these different methods of connecting, how do we know it's always going to work and that there's not going to be some kind of technical fuck-up? Not even a hack, but just like, how can we trust that it's just going to work? Like, is that a stupid question? But I feel like a lot of people think that way, though.
--:-- Zoran: No, it's an incredible question. I mean, there's a few ways it can go wrong. Well, one way that it won't go wrong is what's so cool about the Web3 way is that you're creating a single interface that everyone can program against to do all these cool identity, metadata, authentication things. The fact that you're creating a single interface for everyone else to plug into, as opposed to forcing everyone to re-implement their own security system, is an incredible improvement.
--:-- Zoran: There's a saying in security, like, don't roll your own crypto, right? That's referring to cryptography, not like Web3 crypto. And that is a testament to how difficult it is to make a secure system in a Web2 world. And that's why they always insist, recycle things, reuse things. Don't use systems that you built yourself from scratch. Instead, use things that have received incredible public scrutiny.
--:-- Zoran: The maximal expression of this vision is instead, what if there's an actual authentication network, which is kind of how I think about Web3 networks, and everyone can plug into that. That's, in a way, the most secure thing because it's a single interface that no one person controls that is constantly under scrutiny and being shared by all different kinds of parties for all kinds of different purposes. That is just such a superior security system. It's unbelievable.
--:-- Eddie Lazarin: And the elemental feeling of security is that no matter where my seed phrase is stored, that's always going to be translatable, that whatever blockchain you're using will always recognize it.
--:-- Eddie Lazarin: Yeah, exactly right. There's essentially no way that that connection cannot be made, that the blockchain will not recognize it because the blocks have been validated by this huge far-flung network and they're all stored and they cannot be manipulated and it's immutable and it's always there and it'll always be connected to that C-trace.
--:-- Zoran: I actually think there's critical things that we have to change. Like, for example, the fact that the primary interface that users have is with a single public key. Like, you have the single private key and you have a single public key. Maybe you have multiple wallets, but there's still always this single private key to single public key relationship. That means certain things that are important in security are very difficult. Like for example, rotating out keys. Sometimes you want it just to prevent the risk of keys being shared or a specific old key being compromised. It's a common design pattern. Often people want to be able to rotate keys or expire old keys for the purposes of privacy, of just like keeping things fresh, of kind of like recycling old passwords. But of course, you can't do that in a system where a single private key maps to a single public key.
--:-- Zoran: So instead, a way to solve this is to create a decentralized identifier that's one step removed. And underneath that identifier, you have a public key or even a set of public keys. So that identifier, for example, could refer to a group of people. Or that identifier could refer to me, but I just keep cycling the public key. So my public key is changing, but my identifier never changes.
--:-- Eddie Lazarin: This is kind of like the relationship you have with your password and your Twitter username and your email. You can change the email, but keep the username. You can actually even change the username and keep the email. That's because unknown to you, you have a unique user ID in Twitter that is now revealed in the interface. That thing never changes. That's how you can change your Twitter username and still receive comments from someone else.
--:-- Eddie Lazarin: We need to build a system like that so that people can lose keys, but not lose the network that they've built or the relationships that they've built or the assets.
--:-- Zoran: So what I'm kind of understanding here is that right now there are ways that if you lose your seed phrase, it's kind of like the worst case scenario, right? There are ways to put things in place to make sure you can recover your seed phrase. Many people may not know those ways just yet. So we may see these worst case scenarios crop up from time to time. But it sounds like the further we go into the future, there will be easier ways for these kinds of recovery systems to be in place.
--:-- Eddie Lazarin: Totally. I think it should be because everyone has different risk tolerances and everyone has different attack vectors that they're concerned about. So I can't wait to see that built out. I think most people will generally trust specific institutions or third parties. But it's really important. I think it's a really interesting part of crypto that you always have the option to opt out and put the control of things in your own hands.
--:-- Zoran: Eddie, thanks so much.
--:-- Eddie Lazarin: Thank you as always for your time.
--:-- Zoran: Yeah, a pleasure.
