Users can create new financial relationships using cryptocurrency. The services allow individuals to act as their banks and allow companies to provide services similar to those provided by banks.
Even more arrangements are possible when dealing with n-lock and multi-sig transactions which involve delayed custody, divided custody, and custody based on the solution to an enigma or the revelation of a secret.
Considering all issues at hand, can a company own its customers’ bitcoins? Alternatively, does a company merely provide non-custodial services such as backup key recovery, software design, or escrow?
In the next section, we’re going to outline some questions which include how cryptocurrency transaction works, and who controls the users’ coins.
When does a company control its client’s digital currency?
A cryptocurrency transaction is both an answer to a previous challenge and a way to create a new one. When talking about transactions, sending some cryptocurrency to friends and certain addresses are not termed as transactions. Transactions are more like providing an answer to a challenge that held up funds A and making funds A only spendable by people who can prove they have the answer to a new challenge.
During the transaction, the Cryptocurrency Network evaluates the answer and records new challenges if they’re correct. Now anyone who can predict the answer to the new challenge can spend the bitcoin. As an alternative to using questions and answers, we can use public-private key matchings for digital signatures.
So, when you see a signature made with a private key that matches a known address, the bitcoin in that address can only be spent by the person who can sign a key that matches another address. From here you can send funds to anyone who says the address matches their private keys. However, Keys that have not previously been used for challenges. These keys have no value.
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What is a Multi-Sig Transaction?
In this case, it is the digital signature of key A that matches the address of the sender which is used to lock their bitcoin. The only person who can have access to the locked bitcoins can sign two of the three keys that match the account address. To use an account with a MULTI-SIG for transactions may pose a few challenges because more than one key is required to access bitcoins.
What is an N-LOCK transaction?
The N-Lock transaction proves that the account holder has the keys to the address to which the bitcoins have been sent. With this system, only the individuals that prove they have the key to the address can access the funds in the account in the future.
The N-LOCK transactions have their challenges because the bitcoin can only be used after being idle for a certain period. Using an N-Lock is like giving somebody a future check to cash out at a future date.
An overview of possible wallets
There are different types of wallets users can use to hold their bitcoin down. These wallets include Hosted, Software, Multi-sig, Multi-sig with KRS and Multi-sig with N-lock.
Hosted Wallets
Here the bitcoins are locked with one-key challenge statements, and wallet providers store and generate keys for users who then initiate transactions through their websites.
Software Wallets
Here users lock bitcoins with key challenge statements, while wallet providers provide software to run on the user’s computer, and the user generates the key.
Multi-sig Wallet
The two keys for the multi-sig wallet are generated by the wallet provider, who stores one key for the user. The user generates and stores the other two keys.
Control
Companies that generate wallets for bitcoins can be said to be hosted wallets. Companies that hold bitcoin, as opposed to those that do not, can be distinguished based on if they have the right to transact unilaterally or prevent transactions and, if they can prevent transactions, is there a reasonable time limit that safely returns the user’s control?
Note: This website does not provide financial advice. All articles relating to finance and investments are published for information purposes only.
