In their Cryptocurrency Anti-Money Laundering (AML) report of Q3 2019, Cipher Trace revealed that exchanges and holders were hemorrhaging, losing thousands of valuable coins worth billions of dollars in the open market through theft.
The report found that over $4 billion worth of Bitcoin and other coins had been stolen from leading cryptocurrency exchanges. Startlingly, the overview discovered that this was in H1 2019. While at it, users were seriously considering decentralized exchanges like Ox, Bisq, Dexive, and Airswap.
The whole of 2018 saw $1.8 billion worth of coins leaked from exchanges, and in Q1 2019, a massive $1.9 billion had already been stolen. In Q2 alone, hackers made way with over $125 million worth of BTC, ETH, and other coins with the hack of Binance being a major highlight.
Hackers are Evolving
While exchanges are continuously innovating, bulwarking against intruders, hackers, it appears, are sharpening their skills, outmaneuvering exchange and custodial defenses, and deploying an assortment of lethal tactics to outsmart and steal billions worth of cryptocurrencies.
The same stash, considering blockchain’s silos, is often laundered within exchanges too late to discover that hackers have launched attacks on other ramps, and are attempting to launder their loot through their platform due to information asymmetry.
Exchanges, after a hack, carry out an internal investigation, often announcing an unscheduled maintenance before being admitting infiltration. For instance, the attack in Binance was so sophisticated and it took some hours before Binance posted a press statement saying it had lost 40,000 Bitcoin.
As a leading trading platform, clients expected a fortress, and round-the-clock vigilance. However, by blending their attacks through social engineering, virus attacks, and age-old methods like phishing, Binance lost $41 million worth of BTC, amounts which were refunded to victims from their SAFU fund.
Insurance Funds, Cold Storage, and Multisig Wallets
Efforts are being made to strengthen exchange’s defenses, and the option of Decentralized Exchanges like Dexive is gaining traction. Of note, the attention has been to build trading platforms that are radically different from traditional DEXs, creating an ecosystem and providing tools that allows end users to make trade decisions at the right time.
Decentralized Exchanges are blockchain-based where order matching, execution, and transfer is without third-party intervention. The order book of an ideal decentralized exchange should be within the blockchain.
There are certain advantages that decentralized exchanges tag. Notably, DEXs are non-custodial. This means, the exchange, regardless of its level of liquidity, doesn’t store any of their clients’ funds. This heavy responsibility is on the client, and transactions are usually public.
If the exchange is based on Ethereum, for example, related transactions are visible on the blockchain and searchable through the chain’s block explorer. However, DEXs exchange, though ideal, face liquidity challenges that’s further worsened by complex user interfaces that put off novice or beginner traders.
Centralized exchanges, like Coinbase, Bitfinex, or Binance, use several measures to mitigate losses, should they happen, but remain custodial. That means, users don’t have control, and the exchange holds private keys.
Some steps include the use of insurance funds as aforementioned, while others are more classic and widely used. Implementation of cold storage strategies where up-to 95% of user funds are stored in a cold wallet with multisig capabilities are common. It’s a security measure and a safety precaution just in case of compromise.
Mass Liquidation, Who’s Keeping Track?
But, on a bigger picture, it gets complicated because losses are usually pinned on hacks and loss of private keys barring access. There are few metrics to gauge the extent of trader liquidation through margin calls from various exchanges.
Over time, drawn by the allure of the trillion-dollar derivatives market, exchanges are expanding their products and launching derivative products including Options and Futures.
BitMex is a leading derivatives platform allowing high, dangerous leverage for retail, unsophisticated traders. With high leverage of up-to 100X on Bitcoin, it has been catastrophic for users judging from millions worth of BTC lost through mass liquidation.
Recently, when Bitcoin prices pulled back after breaking above $10,000 to $9,700, data revealed that over $57 million worth of BTC were liquidated in minutes. And this is just once instance.
Often, the bidirectional nature of trading and the “herd mentality” allows traders to punt, herd, and “trade with the trend.” In a shake out, losses tend to be huge, leading to a loss of millions through forced liquidation which may include margin calls.
Decentralization and Social Trading as a Plausible Solution
The decentralized nature of the technology, as spelled out means the community must present a solution that blends both security and savvy trading. By enabling social trading Dexive traders can discuss and issue alerts via the platform’s discussion forum or micro-blog.
This way, regardless of trading style, everyone in the Dexive community is alert, aware of incoming on-chain or macro events.
In the spirit of collaboration, professionals can nurture upcoming traders, relay trading ideas through an easy-to-use interface from a cross blockchain exchange which has enabled advanced order types and a news portal.
Combined, this can reduce mass order liquidation. Also, the non-custodial nature of the DEX means clients have full control of their coins, and the network is literally impervious to external attacks.
Disclaimer: I do not have any vested interest in any of the mentioned projects. The views and opinions expressed are those of the author and is not investment advice. Do your research.