Collusive Federated MPC: Why MPC Networks Can Steal User Assets and How dWallets Solve It

This post journeys through the advancements in MPC (Multi-Party Computation) networks within blockchain technology, from the limitations of collusive federated MPC to the groundbreaking development of dWallets on the dWallet Network, showcasing a significant leap in performance, decentralization, and above all - noncollusivity.

Collusive Federated MPC: Why MPC Networks Can Steal User Assets and How dWallets Solve It

The Foundation of User Ownership

Since the inception of Bitcoin, the concept of user ownership stands as a cornerstone principle of Web3 and blockchain technology. This ownership is fundamentally secured through the use of cryptographic signatures, a mechanism that ensures transactions on a blockchain cannot be forged or altered by unauthorized parties. Each transaction requires a signature, generated by the private key of the user who owns the assets. This cryptographic process guarantees that, without access to the private key, it is practically impossible for anyone, including any number of node operators colluding, to forge the user's signature and steal their assets. This level of security and autonomy forms the bedrock of trust that blockchains are built upon.

The inherent complexities surrounding the management of private keys in blockchain technology necessitate the evolution of custodial solutions. Private keys are the linchpin of blockchain security, granting the holder complete control over their digital assets. However, this model presents significant challenges: private keys are a single point of failure, meaning if they are lost, stolen, or compromised, access to the associated assets is irrevocably lost.

Furthermore, the binary nature of private key possession—either you have it, and thus full privileges, or you don't—precludes any form of granular access control. This all-or-nothing approach to asset management is both a strength and a weakness of traditional blockchain systems, emphasizing the critical need for sophisticated custodial solutions that can mitigate these risks and allow adoption of Web3 and blockchain technology.

Centralized Custodians

Before the advent of Multi-Party Computation (MPC) solutions for Web3 custody, centralized custodians were the primary method for managing and safeguarding digital assets. These entities, often in the form of exchanges or wallet services, held the private keys of users' blockchain assets, or the digital assets themselves, effectively taking full ownership of their funds. This centralized model of custody offered simplicity and convenience for users, particularly those unfamiliar with the technical intricacies of managing private keys. However, it introduced significant risks, including the potential for fraud, mismanagement, and the type of 3rd party reliance that blockchain technology fundamentally aims to eliminate. The reliance on a single entity to secure assets contradicted the core principles of decentralization and user sovereignty that blockchain technology champions.

MPC Custodians: Increasing Trust

To address the limitations and risks associated with centralized custodians, the blockchain industry began exploring solutions for asset custody that can reduce the amount of trust placed with custody providers. MPC emerged as a promising technology in this context. MPC custodians such as Fireblocks or Copper for institutions or Zengo for retail users, represented a significant evolution by enabling a distributed approach to securing private keys and managing cryptographic operations. Unlike centralized models, MPC involves splitting the private key into multiple shares distributed among different parties. No single party has access to the entire key, making it virtually impossible for a single point of failure to compromise the asset's security.

This transition marked a pivotal moment in the quest for decentralized security solutions, aligning slightly closer with blockchain's foundational principles. However, early implementations of MPC custodians require a centralized party enforcing access control, which is still in sharp contrast with Web3 premise of non-reliance on 3rd parties, and left room for improvement in terms of achieving full decentralization and eliminating the risk of collusion.

Federated MPC: One Step Forward, Two Steps Back

While cryptographic signatures provide robust security against unauthorized transactions, the evolution of blockchain technology has seen the emergence of federated MPC solutions as a means to further enhance security and streamline operations. Federated MPC solutions, such as ZetaChain, THORChain, and ICP, employ a distributed approach to generating cryptographic signatures. Instead of relying on a single party to hold the private key, these solutions utilize a threshold of nodes to collaboratively generate a signature through an MPC process. However, it's crucial to note that in these federated systems, the user is not required to participate in the signature generation process. This architecture introduces a potential vulnerability: the possibility of collusion among the managing nodes.

The Collusive Nature of Federated MPC

The federated approach to MPC, while innovative, inherently possesses a collusive potential. In these systems, a handful of nodes manages the MPC process, and if a sufficient number of these nodes were to collude, they could potentially authorize transactions without the user's consent, thereby compromising the user's assets. This scenario highlights a critical distinction from the non-collusive security provided by direct cryptographic signatures, or even centralized MPC custody solutions, where such a breach without the user's private key is impossible.

Centralization and Collusiveness

Federated MPC solutions, which aim to decentralize the cryptographic process of signing digital assets, are constrained by the limitations of existing threshold ECDSA protocols. These protocols, inherently limit the number of participants due to their reliance on unicast communication. This communication model requires each participant to interact directly with every other participant, leading to a quadratic increase in communication complexity as more nodes are added - O(n2).

This effectively limits the number of participants in such a protocol to a handful, usually not crossing into double digits. At 30 participants for example, it could take over 15 minutes to generate a single signature. Consequently, this complexity restricts the scalability of MPC networks, capping the number of participants at a low threshold and thereby preventing these solutions from achieving true decentralization.

At the heart of federated MPC solutions is a paradox that undermines their purported decentralization: the reliance on a limited number of nodes to achieve consensus. This structure creates an environment ripe for collusion. Since only a handful of nodes is needed to generate a signature, if these nodes decide to act maliciously or are compromised, they possess the capability to authorize transactions without the user's consent, thereby endangering the user's assets. This vulnerability starkly contrasts with the ethos of blockchain technology, which prioritizes user ownership, decentralization and the mitigation of trusting 3rd parties.

Why are Federated MPC Solutions Collusive

In federated MPC solutions, a transaction requires a predefined threshold (t) out of a total number of parties (n) to be signed. To ensure that a transaction cannot proceed without the user's consent, the sum of shares held by the nodes must be less than t. This design stipulates that for the network to maintain its security and functionality, any change in the composition of nodes—whether through joining or leaving—necessitates a "reshare" of the MPC secret shares among all network participants for every user, and requires the users.

Furthermore, it requires all users to communicate directly with the nodes, which is very different from the standard blockchain architecture where users don't need to be aware of the internal blockchain structure. Such requirements not only introduce significant logistical and performance challenges but also inherently limit the network from becoming truly permissionless. Every signature and every reshare would act as a bottleneck, disrupting the seamless operation and scalability of the network, and mandating user intervention, thereby detracting from the decentralized, autonomous ideal that blockchain technology strives to achieve.

Because it is impractical to make federated MPC noncollusive or massively decentralized, they are all based on small collusive committees.

Performance Bottlenecks

Another critical limitation of federated MPC solutions is their scalability and performance constraints. The traditional Threshold Signature Scheme (TSS) used in these setups is optimized for a small group of participants. As the number of nodes increases, the efficiency of the system dramatically decreases, making it impractical for large-scale, real-world applications. This limitation not only affects the speed at which transactions can be processed but also restricts the overall growth and adaptability of the blockchain network.

dWallets: Bridging the Gap with 2PC-MPC

The limitations highlighted above underscore the necessity for a new paradigm in MPC solutions — one that can genuinely uphold the principles of decentralization without compromising on security, scalability, or user sovereignty. The introduction of 2PC-MPC by dWallet Labs represents a groundbreaking step forward in addressing these challenges. By requiring the participation of both the user and a (threshold of a) decentralized network of nodes in the signature process, 2PC-MPC eradicates the possibility of collusion, thereby ensuring the integrity and safety of users' assets. Furthermore, its innovative approach to scalability and network flexibility promises to revolutionize the blockchain landscape, setting a new standard for security, decentralization, and user control.

The Dawn of dWallets: A Paradigm Shift

The dWallet Network's use of 2PC-MPC technology heralds the birth of dWallets, a transformative approach to digital wallets that ensures an unprecedented level of security and decentralization. dWallets leverage the strengths of 2PC-MPC to facilitate transactions that require the consent of both the user and a distributed network of nodes. This dual consent mechanism eliminates the risk of collusion and unauthorized transactions, providing a foolproof security model that stands in stark contrast to the collusiveness of traditional federated MPC solutions.

The novel structure of 2PC-MPC directly addresses the limitations of decentralization inherent in existing federated MPC solutions by employing a unique, nested approach that necessitates both a user and a network's participation to generate signatures. This dual-participation framework ensures non-collusiveness, wherein the network alone cannot forge a user's signature, thus dramatically enhancing the security and trustworthiness of transactions.

Furthermore, the protocol can support a broad consensus mechanism requiring a two-thirds agreement among potentially thousands of validators, which not only democratizes the decision-making process but also significantly scales the network's capacity to handle transactions. The nested MPC controlling the network share of a dWallet also means the network is completely autonomous and flexible - users can join and leave without requiring the users of the network to participate, and users don't need to communicate with nodes directly, but instead communicate with the blockchain as a single entity.

By transitioning from unicast to broadcast communication, and using methods such as batching, aggregation and amortized decryption, 2PC-MPC facilitates this expansive participant model, enabling the dWallet Network to support a vast number of users and signature requests per second. This leap in scalability and decentralization ensures that the dWallet Network can offer a truly decentralized and non-collusive environment for digital asset management, making it a pioneering solution in the blockchain space.

Paving the Way for Universal Blockchain Adoption

The introduction of dWallets represents a critical step towards the goal of universal blockchain adoption. By addressing the key challenges of security, decentralization, and usability, dWallets make blockchain technology more accessible and attractive to a broader audience. This increased accessibility is expected to drive innovation and adoption across various sectors, from finance to supply chain management, opening up new possibilities for blockchain applications.

As we stand on the cusp of a new era in blockchain technology, the emergence of dWallets powered by 2PC-MPC technology offers a glimpse into a future where digital transactions are secure, decentralized, and user-centric. dWallet Labs' pioneering efforts in this space not only solve the pressing challenges faced by traditional federated MPC solutions but also lay the groundwork for a more inclusive, efficient, and secure blockchain ecosystem.

Until today, the Web3 builder community could only rely on collusive solutions such as bridges, messaging and federated MPC. The dWallet Network, the composable modular signature network, with its dWallets, finally offers a noncollusive and massively decentralized solution so that builders are not forced to make compromises and sacrifice the Web3 core values of user ownership and decentralization.