Bloomberg columnists and editors Benjamin Robertson, Matthew Leising, and Andre Tan last week discussed with several experts from decentralized exchange projects, research firms, and cryptocurrency exchanges to look behind the reason why there is presently an interest of blockchain projects on decentralized exchanges.
The necessity of decentralized exchanges is quite essential given the fact that any platform or application online is prone to criminal activities, particularly is there no proper security put in place. Even Bithumb and Bitfinex which are the largest cryptocurrency exchanges in the global market go through massive fraudulent attacks and major banks are not an exception to long-term security breaches.
South Korea’s second-biggest cryptocurrency exchange and the only publicly listed cryptocurrency trading platform in the world, Bithumb, in December 2017 disclosed that it held over $6 billion worth of user funds during that time. The cryptocurrency market has since then declined by half its value and according to the present rates of cryptocurrencies, Bithumb has about $3 billion.
A Bloomberg report goes on to state that Xapo, a Switzerland-based bitcoin wallet, and custody service provider, has over $10 billion stored in its cold wallets protected in underground bunkers. $10 billion is deposit surpasses the funds held by 3,000 banks based in the US.
A large number of cryptocurrency exchanges such as Binance and custodian like Xapo keep a vast amount of users fund in cold wallets or digital currency wallets that are not linked to the internet. However, it is unlikely to keep all of the funds in cold wallets as it usually requires more than 24 hours to process withdrawals from cold wallets.
Financial and regulation technology head at PricewaterhouseCooopers (PWC) Hong Kong, Henri Arslanian, who earlier on made an investment into China-based blockchain project VeChain (VEN) noted that numerous cryptocurrency traders keep their funds in cryptocurrency exchanges instead of keeping it in cold wallets or non- custodial wallets because it is more convenient to trade cryptocurrencies on exchanges.
Given that the private keys of user wallets are stored within the centralized servers of exchanges, most investors and large-scale traders view centralized cryptocurrency exchanges as unsecured. In the event of a hacking attack, which is evident in the $500 million security breach of formerly Japan’s biggest cryptocurrency exchange Coincheck, users can likely lose both their funds and private keys.
According to Leising of Bloomberg, even though some developers and analysts such as Sam Tabar at AirSwap expects that with time users will move to decentralized exchanges in the long-term scalability issues are solved, most investors still have doubts regarding decentralized exchanges.
“That depends who you ask. Sam Tabar, a strategist at AirSwap, which opened a decentralized venue in April, predicts that traders migrating to the new model will be this year’s big crypto story. But others such as Chia Hock Lai, president of the Singapore Fintech Association, say the new types, of course, have their own particular issues, such as an inferior user experience and lower levels of technical support,” wrote Leising.