When a cryptocurrency exchange is hacked or subpoenaed, the whole industry suffers. From the days of Mt. Gox crashing the price of Bitcoin, to the modern era of follow-the-money as hackers navigate a complex tunnel of mixers, token swaps, and decentralized protocols for obfuscation purposes, hacks reverberate throughout the cryptosphere. When the dust has settled, the recriminations begin, with calls for withdrawing funds from centralized exchanges (CEXs), self-custodying assets, and trading on DEXs that cannot be pilfered like the KuCoins and OKEx’s of the world.
Until relatively recently, however, DEXs came with their own trade-offs including low liquidity, slow order execution, and lack of cross-chain pairs. All that has now started to change, and as BitMEX is battered by regulators and KuCoin patches up its looted bourse, the case for trading on fully decentralized DEXs has never been greater.
KuCoin Hack Exposes DeFi Facade
In late September, Singapore-based KuCoin announced that it had experienced a massive security incident that put the whole crypto industry on edge. As a result, its hot wallets were compromised, leading to an estimated $240 million loss of customer funds, including the systematic dumping of alt-coin tokens by the hackers.
The KuCoin security team moved quickly to begin a recovery process, with $130 million in stolen tokens secured with help from CeFi projects like Tether and other centralized exchanges such as Binance, according to KuCoin Media Manager Charlie Cai. It wasn’t only centralized projects that came to the rescue. Some of the affected DeFi token projects also offered assistance, with varying degrees of community involvement that questioned the truly decentralized nature of such protocols.
In the aftermath of the attack, Ocean Protocol froze over 21 million OCEAN utility tokens, initiating a hard fork to “reverse the ill-effects of the hack for anyone choosing to adopt the new version of the contract”. KuCoin CEO Johnny Lyu also said it had worked with VIDT Datalink, Covesting, and Akropolis to freeze and recover millions of their respective VIDT, COV, and AKRO tokens. Swift action was also taken by Ampleforth (AMPL), Silent Notary (SNTR), Orion Protocol (ORN), Velo Labs (VELO), KardiaChain (KAI), and Aleph (ALEPH) in the form of upgrading smart contracts or replacing, swapping, or reissuing tokens.
Not All DEXs Are Decentralized
Currently, most decentralized exchanges are susceptible to various points of failure, including regulatory action and admin keys that are not properly managed (as seen recently with OKEx). Various new DEXs have tried to actively combat these issues by creating “more decentralized” products that could survive in the case of an emergency situation such as a hack or regulatory freeze. One of the more interesting projects, Injective Protocol, is a product of Binance Labs and has created what many consider to be the first true decentralized exchange protocol. As a layer 2 DEX for cross-chain derivatives trading, Injective is offering high speed non-custodial trading for derivatives products, helping fill the void left after BitMex’s recent lawsuit from the U.S. government.
BitMEX Charges Make the Case for True Decentralization
Risks to decentralized finance don’t just come in the form of exchange hacks. As demonstrated by the recent CFTC action against crypto derivatives platform BitMEX and its founders including CEO Arthur Hayes, wherever operations are centralized enough, regulators may not be far behind. Especially when it comes to a lack of KYC/AML. This news made many DeFi projects stop and reevaluate just how decentralized they really are in the case of similar action. Many are still at risk of regulatory intervention, even by governments that are located across the world.
This is ironic given DeFi was built on the premise of circumventing exclusionary and often unfair traditional finance products and services. The industry has made great stride and awareness, but now is the true test for DeFi to prove just how decentralized they are. On the plus side, the recent hacks and CFTC action help prove the need of real decentralized products that are self-sustaining and free from any kind of intervention.
Disclaimer: The writer has a relationship with Injective and used his role to access information for this article. The Daily Chain encourages you to carry out your own research before you make any form of investment and educate yourself about how to stay safe in the crypto space.