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Cryptocurrency Exchanges Shift to Decentralization to Elude Supervising User Funds

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In a report on Bloomberg, various columnists and editors talked to a number of experts from decentralized exchange projects, research firms, and cryptocurrency exchanges to assess the impetus behind the focus of blockchain projects on decentralized exchanges.

Any platform or application online is breachable, especially if poor security measures are in place. Even the largest cryptocurrency exchanges in the world such as Bithumb and Bitfinex have gone through large-scale hacking attacks and major banks often fall victim to long-term security breaches.

In December 2017, Bithumb, South Korea’s second-largest cryptocurrency exchange and the only publicly listed cryptocurrency trading platform in the entire world, disclosed that it held more than $6 billion worth of user funds at the time. Since then, the cryptocurrency market has plummeted by around 50% in valuation and so based on the current rates of cryptocurrencies, Bithumb holds roughly $3 billion.

Xapo, a bitcoin wallet and custody service provider that is based in Switzerland, has more than $10 billion in its cold wallets that is held in underground bunkers. $10 billion in deposits is more than the funds currently held by 3,000 banks that are based in the US.

Most cryptocurrency exchanges such as Binance and custodians like Xapo store the majority of user funds in cold wallets or digital currency wallets that are not in any way linked to the internet. But, it is not possible to keep all of the funds in cold wallets as it usually takes over 24 hours to facilitate withdrawals from these wallets.

Henri Arslanian, the head of financial and regulation technology at PricewaterhouseCoopers (PWC) Hong Kong, that recently made an investment in China-based blockchain project VeChain (VEN), stated that a lot of cryptocurrency entrepreneurs do not store their funds in cold wallets or non-custodial wallets but on cryptocurrency exchanges, because it is easier to trade cryptocurrencies on exchanges.

Centralized cryptocurrency exchanges are unsafe for large-scale traders and investors because the private keys of user wallets are kept within the centralized servers of exchanges. When a hacking occurs, as evidenced in the $500 million security breach of formerly Japan’s biggest cryptocurrency exchange Coincheck, funds along with their private keys of users can be all lost.

Consequently, projects such Kyber Network, 0x, AirSwap, and Bancor have began working on decentralized trading platforms to let users trade cryptocurrencies while keeping full control of their funds.

The report on Bloomberg stated that while some developers and analysts such as Sam Tabar at AirSwap expect users to migrate to decentralized exchanges in the long-term as scalability issues are cleared up, most investors still have their doubts about decentralized exchanges.

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