Your Guide to Satoshi Tests, Satoshis and Everything Between
What Is a Satoshi Test?
To confirm ownership of a self-hosted wallet’s address, a predetermined amount of crypto assets is transferred from the withdrawal address to a VASP within a given timeframe, usually 48 hours. The amount transferred is usually the equivalent of USD 1.
Contrary to the name, the transferred assets do not have to be satoshis but need to match the asset type the wallet owner wishes to transact with. If a wallet user can complete this process, it signifies they have control over the address.
How Does a Satoshi Test Work?
The wallet user shares a withdrawal address with the VASP. Even though it’s for a new withdrawal, the address must have a cryptocurrency available to execute the Satoshi Test later. The cryptocurrency used must match the currency the wallet owner wishes to transact with.
Next, the VASP creates a Satoshi Test consisting of the following:
The VASP’s Test address,
A random amount, usually valued around USD 1,
A maximum timeframe (usually between 15 minutes and 48 hours) for the verification according to the applicable AML policy.
This information is then shared with the VASP’s customer through the VASP’s website or via email/chat.
The wallet user sends the VASP-defined amount of crypto from their pre-defined withdrawal address to the VASP’s deposit address within the specified timeframe.
The VASP checks if the transaction has been executed exactly as agreed. If so, the address is whitelisted and ready for transactions.
(With 21 Travel Rule's live blockchain monitoring, the address is automatically whitelisted).
A Satoshi Test may be called a Penny Test or a Micro Transfer by certain VASPs and regulators.
What Are the Pros and Cons of a Satoshi Test?
The Pros:
The process can be automated on the VASP’s side.
It is safer that visual proofs as it is harder to forge.
The Cons:
It’s not free. While the transferred amount can be returned, the transaction fees usually are not, and some VASPs will charge wallet users for that process since staff time is needed for review. This can encourage address reuse. Which is great to save money, but terrible from a security standpoint.
Sending from a specific address is difficult with UTXO-based cryptocurrencies, such as Bitcoin, and often not possible with a wallet.
It is cumbersome, adds friction and offers a poor experience for the end customer, who often requests the VASP’s support to perform it.
This, too, can encourage address reuse as the VASP’s customer does not want to repeat this burdensome process.
The process can be slow if it is not fully automated on the VASP’s side, as the VASP’s compliance team needs to review and respond to the proof.
When and Why Do I Need Wallet Ownership Proofs?
You may need to prove you own your self-hosted wallet to be able to transact with crypto-regulated entities like VASPs. In some countries, VASPs must know who a self-hosted wallet's owner is before allowing a deposit from or withdrawal to such an address. This is part of anti-money laundering efforts.
Do I Have to Own Satoshis to Do a Satoshi Test?
This depends on the coin that you are trying to send. The objective of a Satoshi Test is to prove address ownership, which can be done with a blockchain’s native token.
For example, you would use satoshis if you are trying to send bitcoin. However, if you were to send ETH, you would have to use any token of the Ethereum blockchain (ETH).
Typically, the transferred amount is around the equivalent value of USD 1, representing a fraction of a Bitcoin, with the smallest unit being a satoshi. This explains the origin of the term "Satoshi Test."
What Is a Satoshi?
Bitcoin is the first known cryptocurrency, while a satoshi, also known as sat, represents the tiniest unit of BTC. Converting satoshi to bitcoin entails a ratio of 1 satoshi to 0.00000001 BTC.
Do I Own Bitcoin or Satoshis?
Everyone who has bought bitcoin has satoshis! There are 100,000,000 in 1 BTC. Although most investors own satoshis over bitcoin, it is more common to refer to the coins as bitcoin.
Who Is Satoshi Nakamoto?
Satoshi Nakamoto is the pseudonym of the individual or group responsible for the development of the Bitcoin blockchain. This entity authored the Bitcoin white paper, designed the initial reference implementation of Bitcoin, and played a significant role in deploying it. To date, Nakamoto’s real identity is unknown.