This week in a TechCrunch session, Ethereum creator – Vitalik Buterin – criticized centralized exchanges, saying they should “burn in hell as much as possible.” A mere handful of days later, one of the more popular decentralized exchanges was hacked, with an estimated $23.5 million in various cryptos stolen. Decentralized exchanges don’t rely on a third-party service to hold user’s funds, they simply enable users to exchange funds automatically in a safe environment.
What Exactly Was Hacked?
Seeing as there is no third-party to keep users tokens safe, there is a larger risk when decentralized exchanges are hacked. Thankfully – in the case of Bancor – the hackers only managed to gain access to a wallet used for smart contracts. The hackers managed to withdraw $23.5 million in three different cryptos. They stole 24,984 ETH ($12.5 million), 229,356,645 NPXS ($1 million) and 3,200,000 BNT ($10 million) across multiple transactions. Fortunately, BNT is Bancor’s native token and the exchange was able to freeze these coins, while other exchanges are pitching in to track and recover the stolen NPXS.
Here is the latest update on the recent security breach: pic.twitter.com/JroypFvBri
— Bancor (@Bancor) July 9, 2018
A Setback for Decentralized Exchanges?
Many will see this hack as a setback for decentralized exchanges in terms of them becoming a mainstream force, but is it? When you compare the number of decentralized exchanges that have been hacked and had money stolen – or data leaked – in the past 6 months with centralized exchanges, there is a stark difference. Centralized exchanges are losing the war. It is easier for a centralized exchange to be hacked as user data is stored on company servers, and servers have security flaws in them. Decentralized exchanges are much harder to hack, as there is essentially nothing to hack. It would be a case of a leaked private key, login details, or an issue within the coding of a smart contract – much like the attack on Bancor.
Decentralized exchanges simply connect two users who want to swap their cryptos. Each user will be given a wallet address to send funds to, then the funds are sent directly, the exchange doesn’t store or handle the money. In a centralized exchange however, users store money in hot wallets and the exchange handles the entire transaction. Centralized exchanges often keep large reserves of various currencies as well. Not to mention centralized exchanges can suffer from human error like Bitkoex did. These combined factors are usually why hackers focus more of their energy towards hacking centralized exchanges. However, centralized exchanges more often than not take the hit and refund users their lost money.
Crypto exchanges – both centralized and decentralized – will have their issues with security and hacks – it’s a part of operating in the crypto sector at this point. However, as long as exchanges work together, they can collaborate security patches to make the industry as safe as possible. In addition – as EOS proved – by implementing a bug bounty system exchanges can help mitigate risks for a low cost. After all, lightning doesn’t strike the same place twice, so chances are previously hacked exchanges are safer than their competitors now. Hacks like this are normal in the process of a growing industry and are not cause for concern. When the internet was first launched it was plagued with hacks and outages. Each hack makes the industry more secure and stronger. After all – what doesn’t kill you only makes you stronger!