Time-locked Recovery

In crypto, recovery, and backup strategies are as crucial as the security measures safeguarding the wallets. So instead of a system where secrets leave the protection of a secure enclave or secure element chip, it’s feasible to design systems where a second set of keys can recover funds when needed, with such an event being transparent on the blockchain.
Here’s a detailed look at possible implementations:

On-Chain Activity and Time-locked Recovery

A viable method of securing crypto assets and providing a recovery mechanism is to harness the power of on-chain activity and time-locked smart contracts or Bitcoin scripts. The concept is simple: create an obligation to interact with your account within a specific timeframe; failure triggers a recovery process.
If there’s no interaction with any blockchain within the set timeframe, the system assumes you’ve lost access to your initial keys. This scenario then activates a smart contract or script, which initiates a process allowing a second set of keys to access the funds.

Smart Contracts: In Ethereum and other smart contract networks, contract code can enforce these access rules. The smart contract can be programmed to require the account holder to sign a transaction within a predefined period. Failure to sign a transaction within this period activates a secondary set of keys to access the account through the smart contract.

Bitcoin Scripts: Similarly, a Bitcoin script can mandate users to transfer funds to a new address within a set period. If no such transaction is signed, the script enables a secondary set of keys to spend funds from the account.

Who Holds the Secondary Keys?

In both scenarios, the third-party service holding the secondary keys would be responsible for verifying the account holder’s identity before granting access to the funds. Ideally, this service can be trustless and decentralized. Users can choose from various service providers and options for identity verification. Moreover, these services could leverage secure hardware platforms where the custodian of the hardware doesn’t control the recovery process logic. Instead, the trusted firmware inside the secure enclave obeys blockchain rules and never exposes secret keys.
This approach offers a decentralized and secure mechanism for recovering access to a crypto account if the initial keys are lost while maintaining user control and transparency.