Decentralizing Custodial Wallets with MFKDF
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The average cryptocurrency user today faces a difficult choice between centralized custodial wallets, which are notoriously prone to spontaneous collapse, or cumbersome self-custody solutions, which if not managed properly can cause a total loss of funds. In this paper, we present a "best of both worlds" cryptocurrency wallet design that looks like, and inherits the user experience of, a centralized custodial solution, while in fact being entirely decentralized in design and implementation. In our design, private keys are not stored on any device, but are instead derived directly from a user's authentication factors, such as passwords, soft tokens (e.g., Google Authenticator), hard tokens (e.g., YubiKey), or out-of-band authentication (e.g., SMS). Public parameters (salts, one-time pads, etc.) needed to access the wallet can be safely stored in public view, such as on a public blockchain, thereby providing strong availability guarantees. Users can then simply "log in" to their decentralized wallet on any device using standard credentials and even recover from lost credentials, thereby providing the usability of a custodial wallet with the trust and security of a decentralized approach.
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