El Salvador Needs To Understand The Bitcoin Network

It is important for the country to adopt bitcoin not only as a medium of exchange, but as a store of value on chain.

Recent news from El Salvador has sparked well deserved interest among Bitcoiners and in the mainstream media. The most pressing question is how ordinary Salvadorans will actually use bitcoin in everyday life. For example, will it be possible to adequately secure bitcoin in poorer communities?

The Lightning Onboarding

It’s clear that ordinary, non-technical people don’t have much time to research the ins and outs of Bitcoin. They just need the tools that work. So it’s understandable that so far, Salvadorans have mostly used accessible mobile apps like Strike and the Bitcoin Beach wallet.

While these are great tools for quick onboarding straight to Lightning and provide locals with much needed low-fee payments, such wallets make a trade-off of usability for privacy and security. And while keeping ten dollars in these wallets isn’t such a big deal, using them for family savings is asking for trouble.

Not Just Fintech

El Salvador’s population is 6.5 million. There has never been a coordinated push for bitcoin adoption on such a large scale. It would be disastrous if Salvadorans misunderstood bitcoin as merely a financial technology thing, i.e. something you download an app for and you’re set. There’s a pressing need to grasp Bitcoin (the upper case), at least in its basics. The best way to understand how Bitcoin works is to use it in its real form: handle the recovery seed, perform a few on chain transactions and so on.

Because if bitcoin becomes a part of everyday commerce, some people will inevitably start saving a portion of their earnings in sats. That’s when users will need to level up from hot wallet to cold storage.

Using Hardware Wallets In Poor Communities

As bitcoin spreads around the world and becomes universally recognised, it will also become the most sought-after thing to steal. Bitcoin is liquid, fungible, tradeable in a P2P fashion, and is a bearer asset (i.e. whoever owns the keys is the owner in a practical sense). That’s why self-possession without compromising on privacy and security is so critical. This is true no matter how much bitcoin is at stake. A small bitcoin stash can be life changing for a family of limited means if they’re able to hold on to it safely for several years.

In similar fashion to the Lightning wallets, people need easy to use, battle-tested solutions when taking possession of their own bitcoin. Open source hardware wallets check all the boxes.

The problem is that El Salvador is far from being a rich country. The annual GDP per capita is only $9,140; for comparison, the same number in the U.S. is $68,000. Popular hardware wallets start at $70 and can cost up to hundreds of dollars, which is more than most people can afford in a poor community. So it would be unrealistic to expect Salvadorans to buy hardware wallets en masse. If hardware wallets are to be used, we may see a different approach. It’s conceivable that one device will be shared in a circle of trust, such as a family. This may seem risky at first glance, but the potential privacy and security risks can be mitigated when the proper features are used.

Sharing a hardware wallet within a family is possible without compromising individual privacy and security. The magic trick is using passphrases. A passphrase derives a completely new wallet within the device, one that cannot be accessed or even viewed by anyone without the knowledge of the particular passphrase. So when family members each set up their own passphrase, they can enjoy complete privacy regarding their transaction history and holding amount, even though the physical device is shared. Once the user is done working with Trezor and unplugs the device, there is no way to view any details about their wallet unless the correct passphrase is entered again.

How should the recovery seed be handled in such a setting? Relying on a single guardian could be dangerous — even if trusted, an individual can lose the sheet of paper with the mnemonic seed or be mugged (although passphrases would still protect bitcoin from theft in such a case). Fortunately, wallet backups can also be handled within a circle of trust, using Shamir backups. A Shamir backup is a sharing scheme in which the recovery seed is split into multiple shares (up to 16) with a predefined threshold for recovering the wallets in the future. So for a family of ten, there could be ten Shamir shares with a threshold of six: six family members would have to come together to restore their wallets in case something happened to the device. Redundancy is also a great feature of Shamir backups — in the example above, four shares can be lost without compromising the integrity of the backup (due to the threshold being lower than the total amount of shares).

Sharing a hardware wallet in a circle of trust can be done in a way that doesn’t jeopardize the security or privacy of individual users. Ideally, each user should only use her own hardware wallet exclusively. However, in countries with lower purchasing power, individually owned hardware wallets may not be a viable option, at least initially. Perfect can be the enemy of better, and using a hardware wallet within a circle of trust is better than holding bitcoin on a custodial hot wallet, especially with proper understanding and usage of the technologies described above.

One of the big challenges of bitcoin adoption in poorer regions will be to do it right from the get-go. People need to understand how much there is at stake and how important it is to hold their own keys. They need to value their privacy so as not to become prey to thieves and scammers. This is why we’re currently looking into the most effective way to help with educational activities focused on cold storage, part of which will be a donation of the Trezor devices to local educational workgroups.

This is a guest post by Josef Tětek. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.