Decentralization is taking on its mantle on the cryptocurrency market and is gradually ousting the last vestiges of centralization in the form of centralized exchanges. The continued growth in the prices of major cryptocurrencies on the market due to the rapid development of applications in the DeFi sector and the recent hacks of the KuCoin and OKEx exchanges have paved the way for a new revival of decentralization as a philosophy in application on the crypto market.
Wavebreaking
The third quarter of 2020 has become the summer of Decentralized Finance, or DeFi, as the growth trend in the total capitalization of the cryptocurrency market continued unabated. In the third quarter of 2020, market capitalization continued to grow by 31%, or $75 billion, as capital inflows totaled over $9 billion, driven by growth in the DeFi sector. The market has also seen positive growth in trading volumes by 34% in the third quarter, reflecting a recovery compared to the second quarter.
But the enthusiasm and glee were marred by two unsightly incidents that have ushered in an entirely new wave of negative sentiment towards the mainstays of the market. Two of the most prominent exchanges on the market – KuCoin and OKEx – have been shattered by scandals that have severely undermined the faith and confidence of market participants towards a seemingly time-proven model of centralized exchange governance.
Back in September, KuCoin reported that it was hacked as some unknown attackers devastated the exchange’s hot wallets containing Bitcoin and ERC-20 tokens, inflicting losses of as much as $150 million. The hack was discovered when the exchange’s employees noticed large withdrawal transactions from hot wallets and an ensuing audit revealed a cyber-attack. The attack was most likely the handiwork of one of the exchange’s employees or partners, since the attacker somehow got hold of the private keys to the hot wallets.
Earlier, in January, 16,001 BTC worth $140 million were transferred from the wallets of the OKEx exchange to an unknown address in five transactions summing 3,000 and one summing 1,001 Bitcoins. Though the management of the exchange repeatedly denied that the platform was hacked, users still lost confidence in it and started migrating to more secure havens.
Even earlier, some criminals stole 342,000 ETH from the Upbit exchange, totaling about $50 million at the exchange rate at the end of November 2019.
Losing luster
Centralized marketplaces are losing popularity due to serious security flaws and controversial regulatory stances that are forcing users to seek compromises between vaunted anonymity and accessibility. The outflow of users from centralized cryptocurrency exchanges has been accelerating in recent years as, for example, the Poloniex crypto exchange, has been steadily losing Ethereum liquidity since 2016.
Careful analysis indicates that the outflow of users and projects from centralized platforms is not so much associated with over-regulation. Though the requirements for accounts on centralized exchanges are becoming more stringent, the security of the exchanges is proving to be their Achilles heel.
As a direct result, decentralized cryptocurrency exchanges are becoming more popular for their higher levels of security and the opportunity they give users to conduct peer-to-peer cryptocurrency trading without the interference or moderation from centralized authorities.
Apart from being more secure than their centralized counterparts, some DEXs found the way to increase their throughput and transaction speed - two major cornerstones of the industry. For example, crypto exchange TomiEX features the reconciliation engine capable of supporting 1.4 million requests per second, placing the decentralized platform on par with the fastest crypto exchanges on the market, which is something many DEXs lack. More importantly, such DEX platforms are more secure and stable due to the fact that the node servers are distributed around the world, thus being protected against the hack or manipulation. TomiEX says the network remains stable in case of compromise or failure of up to 30% of validators.
Survival of the unbound
Centralization was necessary in the early days of the blockchain era as users needed to rely on familiar principles and did not fully realize the potential of decentralization. But as the latter evolved, so too did the inevitable afterbirths of government regulation, criminality and technological development. Time and unpleasant events have proven that security is the determining factor for cryptocurrency platforms and decentralized exchanges are now starting to finally attract the attention they deserve.
