Scalable Solutions

Digital asset exchanges in 2021: Learning from mistakes

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Introduction

As the digital asset ecosystem continues to break records – transacted volume, total value locked, userbase, and more – it increases the incentive for malicious actors to exploit it. In 2020 and 2021 alone, the amount of funds locked on DeFi protocols increased from USD $500 million to USD $247 billion. Loots rose consequently – according to an Elliptic report, 2021 DeFi exploits totalled USD $12 billion – with theft and fraud accumulating roughly 87% of that amount, a sevenfold rise from the previous year [1]. There is lots to learn from the mistakes made by digital asset exchanges in 2021. 

Analyzing past events is one of the first steps of improving the cycle. As we approach the end of the year, we take a look at the major events that played out in the digital asset landscape, with a focus on learning from the negative and unusual. With this information, we can improve the decision-making process for the upcoming year.

Read on to find out the mishaps that tormented digital asset exchanges in 2021, and how the right technology partner can help avoid these. 

2021 cryptocurrency exchange mishaps

The following guidelines can be used to evaluate exchanges:

Unfortunately, several exchanges are incentivized to engage in market manipulation practices – pump and dump schemes, wash trading (suspicious trading behaviour using bots), order book manipulation, insider trading, etc. According to NASDAQ’ crypto surveillance unit, wash trading is prevalent in 33% of all transactions.

In a recent study of 29 digital asset exchanges, wash trading accounted for twice as much as NASDAQ reported. According to estimates, wash-trading practices represent roughly 70% of reported volume, improving an exchange’s rankings, temporarily distorting prices, and attracting more users [2]. 

Centralized cryptocurrency exchanges have been destabilized by several hacking events in 2021. Among the most significant are the Liquid Global and Bitmart cases. The Liquid Global exchange suffered a hack in August that resulted in the loss of over USD 80 million, forcing Liquid to secure USD $120 million in debt financing from FTX Trading [3]. A few weeks ago, Bitmart lost roughly USD $100 million in Ethereum wallets. It was later discovered that a concurrent hack had taken USD $96 million more from its Binance Smart Chain wallet holdings [4].

Learn about security in digital asset exchanges: Security Issues in Digital Asset Exchanges.

Based on previous experience of traditional financial markets, it would be fair to assume that the high number of scaling issues found throughout digital assets’ history would tend to decrease in time. Surprisingly, to this date, outages and platform freezes have continued to characterize centralized cryptocurrency exchanges from the smallest ones to the biggest ones. 

The months of May, August, September, November and December saw the biggest scaling challenges in 2021. Binance and Binance.US, Coinbase, Kraken, Gemini, Bitstamp, and dozens more have suffered significant downtime and loss of users funds because of this [5]. 

Perhaps you’ve even read about the class action proceeding that faces hundreds of investors against Binance. These investors reported having lost hundreds of millions of dollars during a major outage, and are aligning to sue the exchange that has no official headquarters [6]. 

Want to know more about scalability?: Digital Asset Exchanges: The Issue of Scalability.
Want to know more about outages?: The other side of Bitcoin’s ATH: Outages.

Customer service is often disregarded as it is not a primary input that any user takes into account when selecting a specific digital asset exchange. Still, it has continuously proven to be more and more relevant as issues arise throughout the trading and investment process. While superior customer service lacks its corresponding publicity, inadequate customer service takes the spotlight in all major social networks. Current cases like that of Coinbase display the inconveniences that hundreds of users go through when reporting issues such as hacks and drain of funds [7].

The lack of satisfactory – or even adequate – customer service has proven to impact centralized exchange’s user base and profitability.

Read about Customer service in digital asset exchanges: Customer support and KYC Integrations in Digital Asset Exchanges.

Going the extra mile: Exchanges’ responsibilities

Astonishingly, current exchanges also suffer from non-technical errors. Even unchecked user errors – such as “fat-finger” or trading algorithms – continue to impact the trading experience – and success – of several traders. The most recent and clear case that showcases this lack of attention and verification mechanisms is that of October 20th. Solely on BinanceUS, Bitcoin momentarily plunged 87% – from ~ USD 65,000 to USD 8,200 – overwhelming its order book [8].

A truly Scalable Solution

In Scalable Solutions you can find the most delicate and robust mix of high-end security, liquidity, technology scaling, KYC and regulatory verifications, and superior customer service. Clients that utilize our white-label services are becoming industry leaders. Scalable technology powers exchanges in the top 50 exchanges by volume and have processed trillions of dollars in transactions, yet have never been breached.  Scalable technology provides a myriad of mechanisms that can make your digital asset exchange top of the industry, without the 2021 mishaps explored above.  Get in touch today to book a demo. 

 

 

 

References

[1] Browne, Ryan. Criminals Have Made off with over $10 Billion in ‘DeFi’ Scams and Thefts This Year. CNBC, 19 Nov. 2021, https://www.cnbc.com/2021/11/19/over-10-billion-lost-to-defi-scams-and-thefts-in-2021.html.

[2] Cong, Lin William, et al. “Crypto wash trading.” arXiv preprint arXiv:2108.10984 (2021).

[3] Partz, Helen. “Hacked Liquid Exchange Receives $120m Debt Funding from FTX.” Cointelegraph, 26 Aug. 2021, https://cointelegraph.com/news/hacked-liquid-exchange-receives-120m-debt-funding-from-ftx.

[4] Sarkar, Arijit. “Bitmart Hacked for $200m Following Ethereum, Binance Smart Chain Exploit.” Cointelegraph, Cointelegraph, 5 Dec. 2021, https://cointelegraph.com/news/bitmart-hacked-for-200m-following-ethereum-binance-smart-chain-exploit.

[5] Keely, Aislinn. “Crypto Exchanges Report Outages amid Extreme Market Volatility.” The Block, 19 May 2021, https://www.theblockcrypto.com/linked/105366/exchanges-outages-market-volatility-eth.

[6] Browne, Ryan. “Cryptocurrency Traders Seek Damages from Binance after a Major Outage Cost Them Millions.” CNBC, 19 Aug. 2021, https://www.cnbc.com/2021/08/19/cryptocurrency-traders-seek-damages-from-binance-after-major-outage.html.

[7] Young, Martin. “Coinbase Users Angry with Customer Support after Funds Disappear from Accounts.” Cointelegraph, 25 Aug. 2021, https://cointelegraph.com/news/coinbase-users-angry-with-customer-support-after-funds-disappear-from-accounts.

[8] Baker, Nick. Bitcoin Crashed 87% on Binance’s U.S. Exchange Due to Algo Bug. Bloomberg, 21 Oct. 2021, https://www.bloomberg.com/news/articles/2021-10-21/bitcoin-appears-to-crash-87-on-binance-in-apparent-mistake.

Sources

Walker, Martin C. W., and Winnie Mosioma. “Regulated Cryptocurrency Exchanges: Sign of a Maturing Market or Oxymoron?” LSE Business Review, 16 Apr. 2021, https://blogs.lse.ac.uk/businessreview/2021/04/13/regulated-cryptocurrency-exchanges-sign-of-a-maturing-market-or-oxymoron/.