Bitcoin was developed as a peer-to-peer cryptocurrency, but as the network expanded, the growing influence of centralized crypto exchanges could not be avoided. Soon after Bitcoin launched, more people wanted to enter the system. While mining was an affordable option at the time, buying crypto with fiat money was more convenient, especially for those who didn’t know how mining worked. The emergence of digital platforms that converted fiat to crypto and vice versa was a natural consequence.
In the early years, crypto exchanges represented an underground space, but one particular platform was able to monopolize the market – Tokyo-based Mt. Gox. In 2014, the service accounted for 70% of all Bitcoin transactions. Everyone knows what happened next – roughly 850,000 bitcoins were stolen from the mountain. Gox’s wallets, which at the time were valued at $ 450 million. At this point in time, the crypto exchange operators realized that security should be the top priority in order to maintain customer trust. As for Mt. Gox, it was forced to file for bankruptcy.
The gradual transition to a safer ecosystem
Newer exchanges learned the lesson from the mountain. Gox and began implementing a number of security measures to protect clients’ crypto funds while maintaining high levels of liquidity and scalability.
The first thing they did was move most of the customer money from hot purses to cold purses. The first category of storage options has continuous access to the internet, making them vulnerable to potential hacking attacks. Instead, a cold room was preferred because it kept private keys away from the Internet.
Soon, third-party custodian services were being requested on a large scale by crypto exchanges. Crypto vaults use wallet management systems with multiple authorizations, in which cryptographic, IT and physical security functions are brought together.
Another security measure that has become almost mandatory in most crypto exchanges is two-factor authentication. This feature requires users to use two different devices to log into the platform.
The development of security solutions went hand in hand with the development of measures to combat money laundering and terrorist financing. Many crypto exchanges have started to adhere to Know Your Customer practices by asking customers to go through a verification process that confirms their identity. This is especially true for exchange services operated in countries with strict AML and CFT rules.
In the past few years, some crypto platforms have introduced additional minor security measures, e.g. B. ID whitelists and anti-phishing codes. The former allows users to withdraw cryptocurrency only to whitelisted wallets. Potential hackers cannot move a customer’s money into unknown wallets as long as this feature is enabled. The anti-phishing code tells users whether the email notifications are genuine and from their registered exchange service. This option keeps scammers away.
Are crypto hacks a thing of the past?
Not really. Despite the security options available, serious problems continue to arise with crypto exchanges to this day. Last year, Coincheck Nem tokens worth over $ 530 million were withheld from the Japanese exchange.
Other crypto exchanges that have been hacked in the past three years have included Bithumb, Binance, OKEx, BitGrail, Coinrail, and Zaif, among others.
Elsewhere, other exchanges may show off their clean history. One such example is HitBTC, a crypto platform that was founded in 2013. Gox Hack, so it’s one of the oldest exchanges out there. It uses advanced encryption technology, cold storage and two-factor authentication to ensure the highest level of security.
The security measures have helped HitBTC to become the largest spot trading exchange ever, with more than 800 trading pairs and over 500 digital assets listed, including Bitcoin, Litecoin, Ether, EOS and others.
Decentralized and hybrid exchange
Decentralized switches have recently become popular due to their status as the most secure version of a crypto switch. They are the perfect solution as their services are not custody, which means users have to keep their private keys in their own digital wallets. Exchanges entering this category only process crypto conversions, so traders can take responsibility for storing their funds.
Decentralized exchanges use blockchains as the main layer. If your network of nodes is well distributed and relatively wide, these platforms are hack resistant.
However, decentralized exchanges lose compliance as there is no central authority that implements the required AML and KYC measures. As a result, many of these exchanges are not legal in certain countries.
Hybrid crypto exchanges solve this problem by offering some degree of decentralization as well as centralized functionality. They allow users to take control of their private keys, but require them to comply with the law by going through a verification process. The aim of the hybrid exchange is to ensure both the security of the decentralized exchange and the flexibility of the centralized exchange.
While decentralized and hybrid exchanges implement the latest in security architectures, this is certainly not the end of the evolution of crypto exchanges. Some experts warn that blockchain networks could be threatened by advanced quantum computers in the future. Quantum computers are growing rapidly, with IBM and Google leading the quantum race. Many crypto traders fear that these computers can bypass the cryptographic barriers and even enable 51% attacks. When these threats become real, the crypto exchanges must develop new security solutions.
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