The Dark Side of Peer-to-Peer (P2P) On Centralized Exchanges (CEX)

Over the years, crypto scams have been on the rise and have also proven to be a topic of interest to anyone in the crypto space.

In December 2021, it was reported that hackers had stolen over $4 billion worth of crypto that year alone.

When a hack has been successfully carried out, the hacker then moves all the stolen crypto to an exchange where they'd be put up for sale in exchange for fiat currency.

According to the white paper of Bitcoin published by Satoshi Nakamoto一Bitcoin was described as an electronic p2p cash system that sought to eliminate the intermediary link between traders and financial institutions.

As a result of this, critics and others who are overly skeptical about the dynamic movement of their monies have since sprouted up from every corner of the Earth—questioning the relevance of a digital currency and the idea of ‘anonymity’ on which bitcoin was built on.

Satoshi Nakamoto simply introduced the peer-to-peer (P2P) system to limit the government's control over an average man's funds in the guise of Central Banks regulations.

In his statement, “payments would be sent from one party to another without the intervention of a physical intermediary to serve as a middleman." 

Satoshi Nakamoto never envisaged a possible future whereby the technical aspect of his creation (Bitcoin) would be scrutinized by bad actors all in a bid to understand its weaknesses and therefore create tools that would be used to exploit it and other crypto projects similar to it. 

On January 15, 2010, in Bitcoin Forum (the website on which Satoshi Nakamoto expressed most of his ideas in the early days of Bitcoin) a user who goes by the username “dwdollar” made a post about building an exchange that’d enable people to trade their bitcoins with each other.

Two months after the revelation, on March 17, 2010, a fully functioning website (now defunct) known then as Bitcoinmarket.com was launched and Bitcoin started trading at the rate of $0.003 per 1 bitcoin.

This feat was recognized as the first-ever centralized exchange. 

Not long after that, other centralized exchanges soon popped up, and amongst them was Mt. Gox, a then-renowned crypto exchange that saw over 70% of the total daily trading volume of Bitcoin.

Its fame would rather skyrocket on a negative note when on February 28, 2014, the company filed for bankruptcy and further investigations would show that Mt. Gox had been severely siphoned of 844,408 bitcoins, 100,000 of which belonged to the company itself, while the remaining 744,408 bitcoins belonged to the users of Mt. Gox. 

Further investigations showed that the attack had begun back in September 2011 (in the early days of the exchange) but the development team chose to keep quiet about it.

This would eventually lead to the collapse of the exchange platform.

Although the early exchanges never had a full scope of what the modern-day P2P system would look like, builders of various exchanges were gradually tilting their ideas toward that area as the need for a more decentralized way of trading cryptocurrencies was being speculated upon.

For some, the idea of peer-to-peer trading might seem all rosy, but, for others, it’s just a nail in the coffin that'd ensure they lose all hopes of ever getting back their stolen assets.

After carrying out huge attacks on other platforms such as "Decentralized Exchanges", be it a hack or an exploit, sooner or later these stolen assets are bound to end up in the peer-to-peer system where they'd be exchanged for fiat currency.

Hackers are then tasked to make sure that whatever crypto they bring into an exchange platform to be sold off via the P2P system, is clean enough to be passed on as legitimate crypto in the sight of exchange developers.

After washing the stolen cryptos clean with the help of cryptocurrency mixers like Tornado Cash (which is currently under sanction in the USA), the next viable place to turn these stolen assets into real cash is an exchange platform with a peer-to-peer function.

One would think that with the existence of Crypto Mixers the footprints of transactions would be well covered by criminals, however, in some cases, the measures they take in cleaning some of these stolen assets aren't just enough to blindfold the watchful eyes of exchange developers.

On August 12, 2022, Binance CEO, Changpeng Zhao tweeted an announcement that his company had frozen/recovered over $450,000 of stolen funds from Curve Finance (a decentralized crypto finance company) and the funds accounted for 83% of the total funds stolen from the exchange.

The Binance owner also joked in the tweet about how the "hacker kept on sending the stolen assets to Binance and thinking it would go unnoticed".

Curve Finance had earlier warned its users not to use the site due to a hacker compromising it and that investigation was ongoing.

However, a whopping sum of $573,000 was later discovered to have been stolen from the platform due to the hack.

One of the main reasons why a hacker would risk moving stolen assets into a centralized exchange and getting caught in the process is the possibility of leveraging the black market opportunity in the p2p platform.

The exchange rate of the real world could be relatively low to that of the p2p black market rate.

Another reason is the quick rate at which the assets could be bought and sold in the p2p market; most especially in regions like Nigeria where their Financial Institutions (Banks) have been banned from facilitating the trading of cryptocurrencies.

In as much as the peer-to-peer system is an easy avenue that the average crypto user turns to whenever they need to convert their virtual currency into real-world money; we can't also shy away from the fact that it has also helped with the laundering of funds of innocent crypto investors.