The rapid collapse of FTX, once the second largest cryptocurrency exchange in the world, followed by the collapse of Celsius, has eroded confidence in centralized crypto services. A brief history of the industry has shown that hack attacks and misappropriation of funds are the two main causes of failure or loss of customers of centralized crypto exchanges (CEX).
If FTX represents the worst example of misappropriation of funds, then Mt.Gox — the Japan-based cryptocurrency exchange that accounted for more than 70% of all cryptocurrency transactions at its peak in 2014 — is the worst example of how a hack attack can cause a crash .
Although CEXs have played a key role in the adoption of cryptocurrencies, the ongoing crisis of confidence does not bode well for the crypto industry. The fear of being the next victim of a CEX crash has prompted many investors to consider decentralized exchanges (DEXs). The ratio of DEX to CEX inflows hit an all-time high of over 60% shortly after FTX went bankrupt in November 2022. Chain analysis.
Source: Chain Analysis
CEX has an urgent task of restoring confidence, and the focus should be on misappropriation of funds. While the crypto industry is still plagued by hacks, their impact is usually limited and contained. Even though 2022 was the worst year ever for a cryptocurrency hack, the value of a cryptocurrency stolen from CEX dropped significantly compared to 2016–2020 Over 80% of the crypto funds stolen by hackers in 2022 were actually linked to decentralized finance (DeFi) protocols, with bridging being the most vulnerable spot.
How can cryptocurrency users trust centralized exchanges again?
Trust has been one of the key pillars of blockchain as a concept. Its decentralized nature was to make transparency an integral part of all processes. Some CEXs may at times ignore their more important mission of maintaining user trust no matter what, and FTX is a painful example.
If centralized crypto services fail to set up barriers to filter out intruders, governments will take matters into their own hands, potentially hurting the industry through over-regulation.
The collapse of FTX was the catalyst for cryptocurrency regulation in most developed countries. While the United States facing a battle between the Securities and Exchange Commission and the Commodity Futures Trading Commission on who should take the lead in regulating cryptocurrencies, the United Kingdom has already layout specific plans.
However, even when governments move to the accelerator to introduce tighter regulation, it will take years before all the rules are properly enforced. Before that happens, trusted third parties can do more to restore trust in the CEX. For example, private rating agencies can operate faster and more efficiently than regulators.
CEXs need to become more transparent before regulation comes
Governments will slowly but surely introduce more control over crypto transactions, but CEXs can avoid over-regulation by becoming more accountable.
Some crypto exchanges are already pursuing this. Recently, CoinEx launched the “Merkle Tree” audit method to confirm stocks. It was one of the first centralized exchanges to provide proof of reserves, which is a way to verify assets and verify that the platform has sufficient funds online to support its clients’ assets. Because all user funds are backed by reserve assets, there is no risk of CEX funds being misused for lending or leveraged risk-taking, the practice that led to the collapse of FTX and its subsidiary Alameda Research.
CoinEx uses the Merkle tree method to prove that the reserve ratio is 100%, which means that in the event of a surge in customer withdrawals, the exchange will have enough funds to meet all requests. The exchange has maintained a 100% reserve ratio since its founding in 2017.
CoinEx has also adopted a number of measures to protect user assets, including standard two-factor authentication, a high-speed trade matching mechanism, login reminders, abnormal IP address change monitoring, multi-level withdrawal verification, API permissions, and real name authentication. .
To date, the platform maintains a zero accident rate through a responsible approach to combating misappropriation of funds and hacker attacks.
In order to improve risk control and asset security, CoinEX has also released a security vulnerability bounty and threat intelligence program that encourages users to check and report any potential security vulnerabilities on the platform. The program divides potential vulnerabilities into three levels depending on their threat, offering participants up to $10,000.
Joint efforts can help restore trust
While exchanges work on their own to improve risk control, they can also collaborate and share information to better identify intruders.
The American crypto exchange Gemini has called for a self-regulatory organization for the US cryptocurrency market since 2018. The collapse of the FTX exchange is likely to hasten the adoption of such collaborative efforts.
Latest reports suggest that Binance is creating a consortium that other CEXs and organizations will join to restore trust in the crypto industry. The consortium is likely to be managed by all participants in a decentralized manner.
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Credit : cointelegraph.com
