Gavin Andresen shows you how to implement a two-factor protection of wallet files

The chief scientist for the Bitcoin Foundation and lead developer for the Bitcoin open source project, the almighty Gavin Andresen recently shared some juicy knowledge on GitHub.

The expert decided to help the Bitcoin users out there and suggested two-factor protection of wallet files. Check out below the original text published by Andresen.

Thumbnail sketch: Two-factor (Yubikey or Google Authenticator) protected wallets

Hardware:

Computer. Shared-secret authenticator (Yubikey/Google Authenticator/etc). Server (possibly shared with millions of other users).

Motivating use case setup:

User creates a split (2-of-2 multisig) wallet on the computer and server. Keys must be securely backed up to protect against lost. GUI to be determined, but there will be some type of “Use Authenticator” checkbox specified at setup.

User also arranges for the server to know the shared secret with the shared-secret authenticator.

Motivating use case, usage:

Coins are sent into the wallet via P2SH 2-of-2 address(es).

On spend, user is prompted for authenticator one-time-password (OTP). If it is correct, second signature is created and payment is made immediately, with no further interaction required(*). If incorrect, no payment made (server should inform user of the invalid payment attempt).

(*) server might offer to further validate high-value transactions via SMS or DNA sample submission or some other authentication method. And server might enforce rules to limit BTC sent per 24-hours or have other protections.

Attacks:

1. Attacker steals computer / private keys, but does not have authenticator device and does not compromise server. Coins are safe.

2. Attacker compromises my computer, installs malware (e.g. keylogger, or replaces client binary). Use of OTP authenticator limits loss of coins to whatever mitigation policy is in place on the server.

3. Attacker compromises server. Coins are safe.

4. Attacker compromises computer and server. Coins are lost, because both keys are compromised.

5. Man-in-the-middle between computer and server. Coins are safe, attacker may DoS (prevent spending).

By the reactions we are watching, Bitcoin users are really digging this suggestion. What about you?