On will understand about crypto exchanges: are they safe
One major advantage is that users can purchase cryptocurrencies with fiat currency, making it an easy way to join the crypto world. On the other hand, exchanges are able to take advantage of regulatory gaps to move between jurisdictions (operating from places with friendly legislation, such as Singapore, Hong Kong and Malta). This makes it possible to offer crypto-to-crypto conversion and trading services to almost anyone with an internet connection.
In the crypto exchange CEXs for example, the exchange is used as a custodian service. This is both a strength and a weakness. Because they hold user funds and provide escrow transactions, they offer a familiar and convenient experience to crypto users who are less tech-savvy, or those coming from the world of traditional trading. However, this brings with it significant security risks.
The problem with a central centralized body in the short history of cryptocurrencies is that losses occur if the exchange does poorly. These losses took many forms, from hacks due to poor security, to “exit scams” where the owners of the exchange stole funds. In the infamous case of QuadrigaCX – the owner of the exchange had sole access to the wallets. He died mysteriously (or, according to some rumors, faked his own death). Part of the problem with the industry is that its unregulated nature has meant that anyone can set up an exchange or present themselves as an expert.
In 2019 alone, about $290 million worth of crypto was stolen from exchanges using hacks2, and 500,000 account logins were leaked. That said, cryptocurrency exchanges clearly have serious security issues that need to be addressed.
Crypto exchanges, not the only option
The risk of storing cryptocurrencies in centralized exchanges is so well known that it has led to the saying “not your keys, not your crypto.” Meaning if you don’t have control over the keys to the wallet that holds the crypto, you don’t have full ownership of the cryptocurrency assets. You are in danger of losing them due to actions of the exchange, whether they are negligently or maliciously managed.
Exchanges that are not as centralized are the Decentralized applications. They are extremely popular on the Ethereum blockchain and have shown considerable growth in 2020. Also, purchasing or converting between cryptocurrencies on non-custodial exchanges reduces some of the concerns associated with CEXs. Because they do not own the user’s assets and operations are transparent, they reduce the risk of inflated trading volume and trading failures.
Also, says On Yabin, there is no risk that the owner of the exchange will take care of the wallets of the exchange, withdraw money from them or try to trade on margin. Non-custodial exchanges allow users to trade from wallet to wallet. This way users maintain control over their funds and private keys. Despite the lack of a middle man (intermediary agent), non-custodial (and therefore non-centralized) exchanges are often more expensive to trade on than on CEX. However, many users find that this high cost is something they are willing to pay to maintain direct ownership of the cryptocurrency.
What is important to know about liquidity in crypto
Another problem has arisen because of the rising popularity of DeFi. In the summer of 2020, there were reports of a large number of “fake coins” being listed on the popular decentralized platform Uniswap4. On Yabin explains that these tokens pretended to be the utility tokens for popular Dapps that actually had no original token. This kind of cheating was made possible because of one of Uniswap’s decentralized aspects: the ability to list any currency and open it for trading. This led to a situation where users requested some type of verification as protection against worthless fraudulent tokens. Meaning fraudulent tokens are another potential risk of decentralization in the DeFi field. However, there are certain types of potential solutions that can be implemented now or in the future.
Submitted by: Cointelligence