Cryptocurrencies threaten to revolutionize major sectors of the global economy. By replacing trusted intermediaries with blockchain technology, startups aim to disrupt banking, crowdfunding, supply chains, real estate, healthcare, and more.
To capitalize on this opportunity, cryptocurrency investors, traders, hedge funds, and enthusiasts have used centralized exchanges to create one of the most volatile and dynamic markets in financial history.
However, currently 100% of the top 50 exchanges by volume are centralized.
Exchanges still remain vulnerable to unrelenting cyberattacks and fraud. Since 2011, over 60 major cryptocurrency hacks have occurred worldwide, with investors suffering $12.6 billion in losses.
Despite an increase in security procedures, the frequency and severity of hacks has only increased. Surprisingly, the rate at which centralized exchanges have been hacked has remained consistent at ~70% since 2011, even with a rise in other potential targets for hackers (ICOs, DAOs, stable coins, and private companies).
During the nine hacks that occurred before Mt. Gox, $7.6M was stolen, representing an average of $850k per hack.
During the 53 that have occurred since then, a total of $1.3B has been stolen, causing the average hack value to jump to $24M.
That is 28x jump in average hack value from the pre-Gox era.
Hack severity has dramatically increased and will continue to get worse as the ecosystem grows. If an exchange is compromised, the true cost of the hack is felt by depositors. This is because those who stored funds on the exchange are unable to recover that money.
The risk that an exchange is unable to give your money back is called credit risk.
Investors, traders, funds, and users currently have two main options when it comes to dealing with exchange credit risk.
Investors that require liquidity to capitalize on profitable trading opportunities can choose to keep their money on centralized exchanges like Binance, Huobi, or Bitfinex.
This option is best for investors who demand immediate access to the markets, such as traders, market makers, and people who are not comfortable with self-storage options.
Investors can choose to keep their crypto in personal offline wallets, meaning they are not exposed to the risk of exchange hacks. By using paper wallets or hardware wallets, like Trezor or Ledger, investors eliminate the risk of a cyberattack by disconnecting from the internet. Note: hot wallets such as MyEtherWallet are still exposed to cyber attacks.
This method is best for long term investors or “HODLers”, as they have no need to access the markets to trade on a regular basis. However, the investor must be comfortable storing their own private keys offline.
Investors have lacked a solution that protects their crypto assets from risk, while simultaneously maintaining access to the liquidity needed to profit from the fast moving world of crypto.
CDx is a smart contract protocol that aims to solve this problem.
Credit default swaps are effectively tradable insurance policies. The buyer pays the seller a premium upfront in return for protection from an exchange being hacked.
CDx protects investors’ crypto assets by allowing them to hedge the risk of an exchange hack or scam through an entirely new asset class: tokenized credit default swaps. This protects investors’ crypto assets, allowing them to insure against exchange hacks and exit scams.
CDx is valuable to anyone that currently stores their assets on an exchange, including both active investors and HODLers.
By eliminating credit risk, CDx allows investors to store their crypto assets on exchanges and trade with confidence.