Different Cryptocurrency exchange has experienced several hacks and huge loss of users funds over the years. This is simply because most of these exchanges that get hacked often use a centralized system.
An exchange is centralized when the decision or governance that controls the progress of the exchange is made by a central body, all funds are collected and stored in a centralized wallet or cold storage etc. Because of this central small control, targeting centralized exchanges has been easy for hackers to exploit over the years, most especially the Mt Gox case where huge funds got stolen.
Users and traders need an exchange that is fully decentralized, whose progress or growth is not determined by a few selected individuals but the community (token holders).
An exchange that newbies to Cryptocurrency and Blockchain can use as a “wallet” too, where they’ll get their private keys without fear of central control or manipulation from a central authority.
Mt Gox centralized exchange scandal
Mt. Gox was a bitcoin exchange based in Shibuya, Tokyo, Japan. Jed McCaleb founded the company in 2010 and Launched in July that same year, by 2013 and into 2014 it was handling over 70% of all bitcoin transactions worldwide, as the largest bitcoin intermediary and the world’s leading bitcoin exchange.
This big centralized exchange company lost almost $500 million in 2014. The hack succeeded after Jeb McCaleb handed over the operation of the website to Mark karpeles because he thought it’d be better for Mark to handle and control the website for better results. 4 months later after Mark took over, the website (Mt. Gox) was hacked from an auditor’s computer and transferred some huge amounts of bitcoin to himself. The news of the hack crashed the price of BITCOIN to about $0.1, later the price stabilized and the market recovered from the price drop, then came the second loss when over 2600 BTC was sent to the wrong address.
After some issues that arose between 2013 and 2014, users started protesting to get their money off the exchange because Mt Gox halted all withdrawals, these made the company change office location several times and that made the price of BITCOIN drop by over 30% of its value.
It wasn’t until February 28th that Mt. Gox finally filed for bankruptcy. The company claimed to have lost over 750,000 of its customers’ Bitcoin and 100,000 of its own Bitcoin. Which at the time was around 7% of all Bitcoin.
On March 20th, 2014 as a testament to its mismanagement and poor structure, they claimed to have found $114 million of Bitcoin in an old digital wallet. Bringing the total loss from $850,000 to $650,000.
After Tokyo Wizsec Security Company did some digging they found that a majority of the coins were stolen over time from Mt Gox’s hot wallet. In August of 2015, Mark Karpeles was arrested being charged with fraud and embezzlement. After interrogation, they found that Mark, himself, had stolen $2.6 million worth of BTC moving it to his own personal account. This was a careless loss of so many valued Bitcoin.
That’s how the failure of centralized exchanges started, although binance has proven to be different and they are working on becoming decentralized: the truth is that the future belongs to decentralized exchanges.
A decentralized exchange is an exchange market that does not rely on a third party service to hold the customer’s funds. Instead, trades occur directly between users (peer to peer) through an automated process. This system can be achieved by creating proxy tokens (crypto assets that represent a certain fiat or cryptocurrency) or assets (that can represent shares in a company for example) or through a decentralized multi-signature escrow system, among other solutions that are currently being developed.
With decentralized exchange, it’s difficult to shut the exchange down because it’s not controlled by a central body or server. Even if you manage to shut the website down, the exchange can still be accessed via another interface. No central deposits for funds and users have their private keys and full access to their account and funds.