Due to the many risks associated with using s (CEX) one would wonder what steps have been done by CEX operators to mitigate them. . centralized cryptocurrency exchange Truth be told many CEX operators have been seeking ways to ensure that the funds that have been entrusted to them are safe One simple but effective way of securing customer’s funds is putting them into , and leaving only a small portion of the digital assets online. It has been described as the most secure way to store cryptocurrency. Cold wallets In fact, one of the largest exchanges in the world, , use a large quantity of cold wallet to safeguard user’s assets. But what actually are cold wallets and how does it work? Coinbase Image Source Cold Wallets . In most cases, they take the form of . The most popular brands are and . To simply put, cold wallets are wallets that are offline hardware wallets Trezor Ledger . The act of moving cryptocurrencies offline means that there is no way to access them online. Hardware wallets have become a necessary security measure especially when dealing with large amounts of cryptocurrencies In the case of hardware cold wallets, transactions are usually triggered and authorized with a button found on the physical hardware wallet itself. . This means the only way to trigger a transactions is to have physical access to the hardware cold wallet Image source Generally speaking, . any wallets that have their private keys stored offline are called cold wallets or cold storage wallet Hence a better definition of cold wallets are and cannot be opened without the access of these private keys which in turn, might be stored in different mediums. wallets or accounts whose private keys are stored offline These includes like the one we have said earlier, , , or even . hardware wallets specialized USB drives paper wallets NFC chips real coins with embedded private keys Image Source Hardware wallets have additional security features such as and that ensure data cannot be easily hacked. pin codes specialized chipsets are also used in combination with strong encryption such as with , they are in turn stored in or . Special types of USB drives FIPS-140 USB drives AES-256 encryption technology safety deposit boxes bank-grade vaults A paper wallet is another cold storage wallet solution, . private keys are printed on paper or any printable, stampable, etchable or engravable medium have been used to store private keys as well embedded in various devices even real coins. NFC chips Image source Insurance . Some of them self-insure like Binance’s much-touted which allocates of all trading fees in the platform only to be used when user funds are in trouble. Aside from keeping users funds in cold wallets, some CEXs have started ensuring funds of their customers SAFU program 10% and also started to insure the funds of their customers. According to Coinbase, the any losses resulting from a breach of , or . Coinbase Bittrex insurance policy covers Coinbase’s physical security cybersecurity employee theft Bittrex, on the other hand, obtained . $300 million in digital asset insurance against theft or collusion for cryptocurrencies in cold storage Image Source . While it is true that the use of hardware wallets increases security from outside risks but it does not remove the fact that if they are on Centralized Exchanges there is still the custody issue. The point of having private keys offline is to ensure that no other person or any entity has access to them except for their rightful owners . Moreover, Insurance will not cover risk brought about by the CEXs themselves such as or due to down-time or technical difficulties CEXs will have complete control of its client’s assets and will have the capacity to even restrict access of users of their own digital assets opportunity cost price volatility Fortunately, there is a better way to trade, one that does not involve losing custody of digital assets which aligns better with the ideals of decentralization. Image Source Decentralized Trading Throughout cryptocurrency’s first decade of existence, centralized exchanges have been the weakest link in terms of security as they serve in many instances as the main conduits of attacks and risks. . This was made possible by allowing users to directly trade from their wallets. Decentralized Exchanges (DEX) have become a viable alternative to centralized exchanges where users have full control of their digital assets DEXs like . Newdex do not require a user account system which means customers are not required to deposit or withdraw their assets to trade . This means that you can connect these wallets to a hardware wallet like Ledger and be able to use them to interact with the desired blockchain. Most wallets used to login Newdex have hardware wallet connectivity function Image Source One such wallet is which allows users to interact with the EOS blockchain. Another wallet is which does the same. Scatter Tronlink . By using these wallets, traders can enjoy the inherent advantages of using decentralized exchanges and leverage the additional layer of security of using hardware wallets Risks on Centralized Exchanges . Moreover, they have also been looking for ways how to secure their customer’s funds while navigating the regulatory environment where they operate. Centralized Exchanges will not go away anytime time soon, they do play a major part in the whole cryptocurrency ecosystem However, while CEXs increase their security measures, . Furthermore, . bad actors have been increasing their level of sophistication on how to exploit security gaps in these exchanges none of the discussed CEX security solutions guarantees against itself if it acts against the interest of crypto holders Image credit: LuckyStep48 | Getty Images The only way to circumvent exchange operators from acting against the interest of its users is if they are not given the chance to do so. . The best way to do this is if we don’t allow exchange operators to take custody of our funds Decentralized Exchanges This is only possible in a decentralized exchange setting where digital currencies never leave the custody of the customer. In this way, and is ensured that the transaction will push through, be confirmed and finalized guaranteed by the blockchain itself. traders need not trust the exchange operator . There are many decentralized exchanges out there and they support a wide range of blockchains. If you are a new trader or new to the cryptocurrency trading it is in your best interest to look into decentralized exchanges (DEX) and learn how to use them Image Source I have previously written an about non-custodial exchanges discussing how it works as well as a step-by-step tutorial on how to create a wallet/account for free and how to connect it to a DEX. article in Hackernoon For demonstration purposes I used as an example as it is the biggest DEX in EOS and allows CPU resource free transactions. It is also perfect for new traders as it . Newdex provides limited resource free transactions . The biggest DEX market right now is the ETH ecosystem. However, it is . Choosing which DEX to use is primarily the choice of the user hounded by scalability issues and expensive transaction fees especially when its network is congested Image Source EOS, on the other hand, has and a . This means there are lesser risks associated with transaction fees and latency issues, enabling better trading opportunities for traders. feeless transactions highly scalable blockchain . The feeless transaction mode of EOS is a perfect match for new traders who want to gain experience decentralized trading without too much expense . Despite their best efforts, there are simply inherent risks associated when using centralized structures. Decentralized trading is widely considered as the future of crypto exchanges and DEXs are leading the way in realizing this. So are Centralized Exchanges (CEX) doing enough to safeguard customer assets? The short answer is no, not yet This is perhaps why some of the biggest and most established exchanges in the crypto industry have begun exploring decentralized exchange services for their customers, which is a clear indication that . DEXs are indeed the natural evolution of cryptocurrency exchanges Transparency Disclosure The above article is a commissioned work for Newdex. I was tasked to write a comparative article between Centralized Exchanges and Decentralized Exchanges. Total creative freedom was given to me. All the information stated above came from my own research and statements are of my own opinion based on my experience and knowledge. It has not been edited by Newdex or any of the aforementioned projects in the article.
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