For the average person who isn’t very tech-savvy, Big Exchanges are unquestionably safe. They do, however, come with their own set of risks. Millions of dollars in customer cash are held in exchanges’ hot wallets, making them a possible target for hackers. Big figures have been involved in some of the most significant hacks in Crypto history.
- Mt. Gox – $8.75 Million in 2010 & $615 Million in 2014
- KuCoin – $281 Million in 2020
- Upbit – $45 Million in 2018
- Binance – $40 Million in 2019
- Crypto.com – $34 Million in 2022
These figures exclude the risk of exchange owners fleeing with users’ money, which has happened in the past. Africrypt, one of South Africa’s largest exchanges, stole $3.6 billion in user assets and fled the country with its owners.
Turkish exchange Thodex’s CEO went missing when users filed complaints alleging hundreds of millions of dollars were stolen from their accounts.
As a result, the crypto saying has always been “Not your Keys, Not your Coins.”
How Centralised Exchanges Work?
Users do not obtain Crypto assets inside their wallets when purchasing Crypto assets via an exchange like Binance or WazirX, for example, because on-chain transactions are expensive and time-consuming. The exchange issues an IOU, and the money appears on the account as a server record.
When someone trades on an exchange, they get to keep a percentage of the total amount as a fee, which is normally 0.1 percent to 0.5 percent. This is how the exchanges make money upfront, but isn’t that not all they have to offer?
Users of Binance, for example, can borrow several cryptocurrencies on the site and pay a fixed annual interest rate. Exchanges can genuinely profit by lending your idle Bitcoin to an unknown stranger for a set annual return. Even if you didn’t sign up for it, it puts your investments in danger. Now, I’m not pointing the finger at anyone. In the event of a default, exchanges will definitely seize some collateral.
Where’s the risk?
Just in case you’re wondering about the potential risks for an investor, I’ve mentioned some of them below.
- If you’re lending money out like a bank, a bank run will occur if every depositor wants to withdraw their savings. The same is true for these exchanges when everyone tries to pull out their Bitcoin at the same time. IOUs aren’t Bitcoin.
- In bear markets, exchange shutdowns are not uncommon. When interest rates are raised over the world, VCs and investors stop infusing cash into riskier markets. Due to a cash deficit, these non-profit platforms are forced to either reduce their operations or become profitable in order to collect more funds. If you keep your Bitcoin on a platform that could go down, you’re putting your assets in danger.
- Hacks aren’t that rare either. To execute daily deposits and withdrawals, exchanges store large balances in their hot wallets. In certain situations, the assets are worth millions, if not billions of dollars. Even if these platforms have strong security features such as multi-sig wallets, we can’t rule out the possibility of a security breach. In the unlikely event that the exchange goes bankrupt, you will lose all of your assets held in the exchange. Not your keys, not your coins, as I already stated.
How do Hardware Wallets Work?
Hardware wallets are intended to function as a computer with the bare minimum of technology. There is no access to Wifi, Bluetooth, or 4G data. It’s an entirely offline device designed to keep your wallet keys secure.
When compared to centralized exchanges, when you use a Hardware Wallet, you actually own the assets rather than the IOUs. These assets are visible on the blockchain inside your own wallet. Your funds are completely safe unless you divulge your Seed Phrase online to a stranger.
On the other side, Metamask and Trust Wallet are software wallets. They also have the concept of Seed Phrase, but no one can say whether or not they are completely secure. These Hot Wallets are always online and keep your keys on your device. If a hostile hacker gets to approve a dubious contract using your Metamask wallet, your assets will be suddenly gone in a flash. The same is true if they manage to embed malware in a cracked program.
What difference do Hardware Wallets make?
- Before being broadcasted to the network, crypto transactions must be signed using your private keys. An algorithm generates this private key from the Seed Phrase. As a result, if your Seed Phrase is lost, your assets are likely to be taken.
- This transaction signing technique is fully offline with hardware wallets. It’s important to note that you’ll need to begin transactions using your phone or your PC. Only the signing is done offline using QR codes, ensuring that the Private Key never leaves the Hardware Wallet.
- If your phone/PC is infected with malware while using a Hardware Wallet, your funds will be safe as long as you haven’t kept your wallet keys on the affected PC. That is why offline storage on a sheet of paper or metal plates is recommended. Avoid photographing your Seed Phrase.
- If your Hardware Wallet is lost or stolen, you can replace it and regain access to your wallet using your original keys. Hence, to summarise, getting one for yourself is absolutely worthwhile. Hardware wallets are very inexpensive, starting at $50, and they typically last 20-30 years for the average user.
- SafePal S1 Cryptocurrency Hardware Wallet, Bitcoin Wallet, Wireless Cold Storage for Multi-Cryptocurrency, Internet Isolated & 100% Offline, Securely Stores Private Keys, Seeds & Digital Assets – https://amzn.to/3wib8OY
- [Bundle] Ledger Nano S + Billfodl Hardware Wallet for Seed Words Backup | The Best Crypto Wallet + Cold Wallet for Crypto Compatible with BIP39 Wallets. Store Your Bitcoin, Ethereum, ERC20 and More – https://amzn.to/37Mavns
Thanks to Ethereum Push Notification Service
You may have already noticed that we don’t serve any ads on our website. That’s because of awesome projects like EPNS which help us sustain the website. If you don’t know about them already, it’s a decentralized Web 3.0-based notification platform. Unlike Android or iOS notifications, EPNS uses a decentralized approach to send alerts about your activities on DEXs and platforms like CoinDesk, MakerDAO, BTC Tracker, and more.
How to get started?
- Firstly, you’ll need to have a wallet like Metamask, WalletConnect, etc.
- You can then download the EPNS application from Play Store or App Store and sign up using the Wallet ID.
- If you’re like me, a Browser Extension must look like your favorite option.
- Go to the available notification channels.
- Click on “Opt-In” & Sign the popup. It’s free and doesn’t take any gas.
- That’s it.
The best part, EPNS is already working on a Wallet to Wallet messaging service. If you haven’t checked them already go now!