Cryptocurrency exchanges are not safe anymore. Over the years, multiple cryptocurrency exchanges have been hacked and billions of dollars have been lost in funds and assets combined. The crypto industry is plagued with hackers and the centralized crypto exchanges are turning out to be a hunting ground for these cyber-criminals.
Hacks on Centralised platforms on the rise
The past few years saw a rapid rise in the number of hacks. A report from blockchain analysis platform Chainalysis, 2019 saw more than 11 major hacks and the hackers managed to steal more than $283 million in cryptocurrency assets. The previous year saw $875.5 million stolen from just six hacks.
The biggest single hack in 2019 was on a not so popular exchange Coinbene. The hackers managed to drain $105 million worth of various ERC-20 tokens from the exchange’s hot wallet in March. At the time, the exchange denied it had been hacked, but later admitted what had happened.
Probably the most notable hack from last year was that of the most popular cryptocurrency exchange, Binance. Earlier in May, a combined malware and phishing attack resulted in the loss of 7000 BTC, approximately $41 million at that time.
The largest cryptocurrency exchange in South Korea, Bithumb, also experienced an attack in May 2019. The attack resulted in around $19 million stolen. The hack was considered to be an inside job as the stolen assets were from the exchange’s reserve funds. This may have led many to question their trust in centralized exchanges.
The problem with centralized exchanges
Centralized exchanges are not the best of places to store crypto assets. The aforementioned events are perfect examples of that. Anyone storing their assets in a centralized exchange is putting their faith in the organization. Even the smallest of bugs or errors on the part of the exchanges could lead to an unrecoverable damage.
There are even cases of exit scams where the entire exchange turns out to be fake. The problem with centralized crypto exchanges was perfectly showcased by the IDAX exit scam. Chinese cryptocurrency exchange IDAX had suddenly halted all deposits and withdrawals, citing that the company’s CEO had gone missing with the keys to the company’s cold wallet.
2020 began with the catastrophic hack of an Italian crypto exchange Altsbit. The platform announced on 6th February, that its hot wallet had been breached. Nearly all of its BTC, ETH, ARRR, and VRSC holdings were reported to have been stolen. What’s surprising is the fact that the exchange had been active for just five months after a major rebranding.
However, it’s worth noting that established centralized exchanges are making efforts to increase security, with many exchanges also offering insurance in the event of a hack. This increased security does come with higher transaction costs, but the hackers continue to outrun them.
Decentralized exchanges (DEX)
These events have led to the rise of decentralized and peer to peer exchanges. Some basic advantages these types of exchanges hold are enhanced Privacy due to no registration requirements or KYC process, no deposit or withdrawal is required, and all the transactions are handled by secure smart contracts, and most importantly, no single point of failure, control or regulation.
Some popular decentralized exchanges are the Binance Dex and dYdx. The backlash against centralized exchanges at one point turned into a movement dubbed “proof of keys” that was started by Trace Meyer, who suggested that every bitcoin owner who has stored his BTC on a centralized exchange should transfer it to his own wallet.
However, using a decentralized exchange puts some additional responsibilities on the shoulders of the user and the majority of the new users entering the crypto space don’t want to go through all the hassles. This has been one of the primary reasons why decentralized exchanges haven’t gotten the attention they deserve.
As the crypto industry continues to mature, it can be expected that the people involved will realize the various risks associated with using centralized platforms. One of the key blockchain features is the ability to have full control over everything you own. However, this privilege is lost when a third party gets involved.