Blockchain the next frontier in Fintech
Blockchain technology has opened a new frontier in finance. For the first time in modern history, we are given a technology that gave us an option for an alternative monetary system that is more egalitarian, inclusive and beyond the control and frailties of centralized structures. This new technology made it possible for peer-to-peer transactions to occur without having to depend on any intermediary or centralized authority to ensure that the transactions will push through and are irreversible. The potential of this technology was demonstrated with the creation of bitcoin which has been disrupting financial structures worldwide.
While many in the finance industry acknowledge the immense potential of this new emerging asset class it has yet to reach mass adoption. There are many factors at play why this has not yet happened, these are the many risks involved when dealing with such a nascent industry. The relatively young industry has yet to achieve the level of maturity other financial instruments have reached. According to one of the big 4 accounting firms, KPMG, the key to crypto growth is halting the massive theft that has been happening in the space.
Massive theft in the crypto industry
In an article published in Bloomberg, the accounting firm pointed out that at least there have been around $9.8 billion in cryptocurrencies stolen by hackers since 2017. They blame lax security or poorly written code as the primary culprit why such a huge number of these cryptocurrencies have been stolen. Furthermore, investors especially institutional ones will not risk owning crypto assets if they cannot be safeguarded effectively in a similar fashion as cash, stocks, and bonds. Custody is such a big factor in the space that it believes that custodians have a tremendous opportunity to profit.
To demonstrate the earning potential of custody services and the many allied services that come with such a business, some of the biggest names in both traditional finance and decentralized finance have started offering customers custodial services. They include Fidelity Investments, Intercontinental Exchange Inc, Coinbase Inc., and Gemini Trust Co. Custody services revolved around protecting the private key of wallets that hold the digital wallets. This are the same keys that users generate when they use a non-custodial wallet.
Centralized Exchanges are Preferred Targets
The accounting firm, however, failed to stress that a big portion of the $9.8 billion in cryptocurrencies stolen by hackers came from Centralized Exchanges (CEX). The huge amounts of cryptocurrencies stored in just a few cryptos wallets have become attractive honeypots just waiting to be exploited. To make things worst any client funds that are stored in these types of wallets are always at risk of being locked away by the operator of the exchange for whatever reason they declare.
We can say that each time an owner sends his cryptocurrencies to wallets that they do not have personal access to its private keys is tantamount to relieving themselves of ownership of the sent assets. This is especially true in the case when users keep their assets in a centralized exchange as there are many internal and external risks involved when using them. The history of the huge number of cryptos stolen from centralized exchanges proves that it is the preferred venue for hackers to steal cryptocurrencies.
Due to the persisting threat of hacks in CEXs, many of the bigger exchanges have started ensuring the crypto that has been entrusted unto them by their customers. Binance has an equivalent to a self-insurance policy where it saves 10 % of all generated revenue to secure customer funds. Coinbase and Bittrex, on the other hand, acquired insurance from third parties for both internal and external threats. While they are indeed improvements in security the vast majority of exchanges do not have such safeguards. And even if this becomes mandatory as regulators start to regulate the space it does not mitigate the risk of custody.
Fortunately, we have decentralized exchanges (DEX) that enable users to trade directly from their non-custodial wallets. This is by far the safest way to trade as digital assets never leave the wallets of the owners, not until the moment, the users themselves trigger a transaction by which the smart contract takes over to execute the trade. When conditions are met the transaction will execute and no one will be able to stop it since it is governed by the blockchain. Even operators of the DEX will not be able to stop the transaction.
Newdex is an example of a DEX that features non-custodial trading with smart contract matching and settlements. This means that transactions are fully governed by smart contracts and are guaranteed to push through even if the Newdex site is inaccessible. According to Newdex, the smart contract was deployed after it passed rigorous security audits from two leading blockchain security companies SlowMist and PeckShield. This ensures that the design logic of the smart contract, authority control, and system architecture are sound and passed all attack and defense tests.
It has been said that not all DEXs are created equal, with the implementation of full on-chain matching and settlement Newdex can be considered as one of the most decentralized trading platforms in the industry. In addition, it supports many of the most scalable blockchains in the industry today — EOS, EOS-based sister chains as well as TRON. This multi-chain approach enables it to offer one of the widest crypto pairs in the whole DEX industry and helps it mitigate one of the challenges in decentralized exchanges which is the lack of trading pairs.
A solution to curb out theft in the crypto industry
The centralized exchanges have been the target of many major hacks in the industry. To significantly lower the number of theft it is of utmost importance to secure them. However, it has been proven to be difficult and expensive with many of the centralized exchanges unable to implement the most effective ways to secure their platform. Perhaps the best way to mitigate this problem is to drop centralized trading altogether and support for the growth and development of Decentralized Exchanges.
Decentralized exchanges present an efficient and cost-effective way of mitigating risks related to the custody of digital assets. By allowing digital asset holders to trade directly with their wallets we remove the user account system and transfer the responsibility of securing digital assets to their owners. These owners will then be able to protect their assets by leveraging the security features of the supported blockchain. Since users have unrestricted access to their digital assets in these settings there is no way they can be locked out of their own account.
Running a decentralized exchange should have a lot less operating overhead compared to centralized exchanges which means exchange operators will have better profit margins. This should be enough reason for any centralized exchange operator to explore the possibility of running their own DEX. They can look at the example of some of the leading exchanges in the industry like Newdex which has become the biggest decentralized trading venue in the whole EOS ecosystem and perhaps in the wider crypto industry.