The 2 Major Roadblocks Preventing Decentralized Exchange Adoption
By now you’ve almost certainly heard the news about the death of QuadrigaCX founder Gerald Cotton, which left about $147 million in cryptocurrency on the exchange inaccessible by its owners.
There has been quite a bit of speculation that Cotton isn’t really dead and that this was an elaborate ruse to make off with a portion of the money. But whether or not he’s setting up a new life on a little-known beach somewhere is beside the point for most people.
The real issue behind this event is the use of centralized exchanges that hold onto people’s cryptocurrencies and private keys for them.
If these exchanges are controlled by a single entity, they operate under a system where only one person can access the crypto (which is ludicrous but apparently happens). So there’s no accessing the exchange when he or she dies.
And if the exchange just decides to shut down or maintenance or is breached, its users are out of luck — and money.
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Keeping users’ keys and crypto secure requires a shift from centralized to individualized key management. But how are users expected to safely and properly store seed phrases for dozens of cryptos when they can’t even manage their Apple ID passwords?
The answer, and the real future of crypto exchanges, lies in true peer-to-peer decentralized exchanges (DEXs), but much of the infrastructure needs to be built before they can scale.
Here’s why it’s essential to solve for security and key management issues, and move forward with DEX adoption:
Centralized exchanges have intrinsic issues regarding security.
In the U.S., people trust centralized institutions like banks to hold onto money and data in order to make transactions seamless.
A tradeoff is made — they’ll trust institutions enough to handle all their transactions, but they want guarantees in the form of FDIC insurance and regulations to guide behavior.
But for the most part, people trust the system. That trust tends to bleed over to centralized crypto exchanges, even though these have none of the traditional safeguards in place that a federally-insured bank does. Oftentimes, people realize too late that the custodians of their crypto may not be able to care for it properly.
Remember, if it’s not your key, it’s not your crypto.
Unsurprisingly, centralized exchanges have become major targets for hackers.
Just last year, Coincheck was the victim of the largest cryptocurrency hack ever, losing roughly $400 million in tokens on its blockchain. Of course, they were only breaking the record held by the infamous Mt. Gox hack, which came at a cost of about $340 million. By October, nearly $1 billion worth of crypto had been stolen in 2018.
Sometimes, hacks are foul play. Sometimes, they’re honest mistakes. But time and time again, centralized exchanges have not proven to be the best place to store crypto.
Sloppy key management presents a risk to new crypto users.
The reason people still use centralized exchanges, however, is because personal key management is fairly complex.
When you choose to store your own key, you’ll be given either the hash of data or a seed phrase — 16 random words that are representative of the key. You shouldn’t store those in the “hot wallet” (a wallet connected to the internet) because of the risk of it being compromised. The most secure way of storing it is putting it in cold storage, i.e. writing down the seed phrase on paper and placing it in a safety deposit box or a personal safe. Some people even engrave the phrases on metal for added protection.
But as we’ve seen, if someone dies, the key may be lost for good.
It’s unsafe to leave instructions on how to find it, yet people obviously don’t want to lose out on part of an estate just because no one but the deceased knows how to access the money.
Although individual key management is the ideal scenario, it’s also currently a lot more cumbersome to hold onto your own keys and bring them to a DEX in order to exchange crypto on a peer-to-peer level. So, people use centralized exchanges because right now they’re faster and much more convenient than DEXs.
And they’ll continue to do so until those issues have been resolved.
Decentralized exchanges represent the most secure option, but they have yet to take off.
If DEXs are going to become anything more than a niche tool for those most adamant about their security, they’ll have to become easier to use.
One solution may be obtaining a third-party, self-sovereign identity that you use on the exchange in combination with a key management solution. There is already plenty of work going on to create key management systems that allow users to maintain custody over their crypto but offer more security than that of a centralized exchange.
For instance, Casa now offers a personal multisig key management system, meaning the “signatures,” or authorizations, have to come from three out of five devices located in different places.
It’s also important to remember that we currently have a generation reaching maturity that has been immersed in the digital world since birth.
There’s a bit of a generational gap when it comes to crypto use, and certainly, older generations are more comfortable with centralized entities handling their crypto — if they’re comfortable with the concept at all.
But if we can put the infrastructure in place for people to begin using DEXs, there will be a significant population of younger people ready to use them. And once their use becomes normalized, we may finally have the secure, widespread, peer-to-peer exchange crypto users have been waiting for.
Thanks for reading!