Despite centralized cryptocurrency exchanges suffering nearly $300 million worth of hacks during 2019, many digital currency traders continue to hold significant sums of capital on centralized exchange platforms. While many noncustodial crypto services have launched in recent years, few platforms have been able to garner significant liquidity..
Erik Voorhees, CEO of the noncustodial cryptocurrency exchange ShapeShift, said that “Noncustodial exchanges provide a fundamentally safer way for individuals to trade digital assets.” He went on to add:
“Traditionally, exchanges are custodial (and almost all of them still are today), and thus they hold user funds. Some exchanges literally hold billions of dollars worth of crypto on behalf of their customers. This crypto can get lost, hacked, stolen, mis-accounted, etc. […] Often, this destroys the exchange and the customers are out of luck — they bear the risk of these losses.”
Despite his preference toward noncustodial platforms, Voorhees noted that many noncustodial exchanges exhibit some limitations, such as cultivating a “more complicated user experience,” or exclusively operating “with Ethereum and Ethereum-based tokens.” However, Jack Tao, co-founder of digital currency derivatives platform Phemex and a former Morgan Stanley executive, is less certain about which is the safer option. He said that both custodial and noncustodial exchanges cater to different needs:
“I don’t believe it’s possible to determine which type of exchange is ‘safer’ in absolute terms, both answers to different traders’ needs.”
Tao suggested that the successes of noncustodial platforms may be contingent on the popularity of centralized exchanges, arguing that, “the success of noncustodial exchanges would be a sign that conventional exchanges are failing to remain trustworthy and transparent with their customers.” The Phemex co-founder emphasized that noncustodial exchanges expose traders to different security risks, asserting his belief that, “Asset security should be a burden carried by the exchange rather than the user.” He added that Phemex developed a cold wallet system that stores “users’ funds in independent deposit addresses, to be insured in the event of any emergency.”
Alan Curtis, the CEO of the noncustodial ERC-20 token wallet Radar Relay, said that centralized exchanges currently comprise “the foundation of the cryptocurrency industry,” despite the security risks associated with such platforms:
“Problem is, there’s a chance users of those exchanges could never see their funds again! Since 2011, there have been 50+ disclosed hacks of centralized exchanges accounting for billions of USD and private user information lost. Somehow, ten years later, most digital asset users are still funding honey pots for hackers!”
Curtis argued that recent “incremental improvements in custody solutions” made by centralized platforms are “insufficient,” urging the cryptocurrency sector to transition toward noncustodial solutions at large.
Curtis Spencer, the managing partner of Electric Capital — an early stage venture capital firm focused on cryptocurrencies and distributed ledger technology — has since released a balanced appraisal of the strengths and weaknesses offered by both custodial and noncustodial exchange platforms. Drawing from experience in trading cryptocurrencies across various venues, including “centralized exchanges, noncustodial exchanges, OTC, and smart contract-based exchanges,” Spencer detailed several risks associated with centralized and noncentralized exchanges:
“The simple formula of custodial risk = (amount x time) / size of balance sheet can be useful in evaluating the risk of trading on a particular venue. In a traditional centralized custodial exchange, you take bigger risks by storing large amounts of cryptocurrency there for a long period of time, but that can be mitigated by using exchanges with larger balance sheets than can absorb a multi-million dollar hack. Unfortunately, the balance sheet strength of an exchange is usually not very transparent.”
Spencer argued that the term “noncustodial” is regularly misused, claiming that many purportedly noncustodial platforms would more accurately be described as temporarily custodial. According to Spencer, noncustodial exchanges decrease their users’ risk by shortening the time frame during which they hold onto the assets, however:
“Users are still subject to being censored and the lack of transparency in what the noncustodial exchange does with assets once they are received.”
Despite such, Spencer stated that said noncustodial platforms “encourage better crypto hygiene by having users actually manage their private keys as opposed to relying on bits in a centralized exchange’s database.” Spencer asserted that smart contract-based exchanges are the only platforms that can be truly noncustodial. He described these platforms as being relatively new, typically hosting “lower liquidity than their centralized counterparts” and having a steep learning curve. However, he concluded that smart contract-based exchanges are a step in the right direction, as they “preserve both the privacy and safety of assets of the users trading on them.”
Steven Quinn, a product manager at cryptocurrency exchanges Eosfinex and Bitfinex, shared his view that “noncustodial solutions eliminate the need to trust a third-party with precious assets,” offering numerous benefits to both consumers and the industry. Despite arguing that noncustodial exchanges have the potential to drive a “new paradigm” in digital currency trade, Quinn identified several major challenges to the widespread adoption of decentralized exchange platforms.
3 Big Blockchain Firms Working Together On A DeFi Product That Pays Passive Income
In a special announcement made at the Unitize conference on July 6, Cosmos, Polkadot, and Terra revealed a new DeFi savings product called Anchor that aims to offer dependable interest rates on stablecoins deposits. The companies involved in the creation of Anchor plan to launch it across their respective blockchains at the end of Q3 this year and scale across to other PoS blockchains in the future. Do Kwon, founder and CEO of Terra, explained in a prepared statement:
“While DeFi staples such as Maker and Compound have been revolutionary in creating fully decentralized crypto money markets, the volatility of their interest rates makes them unsuitable to be used as a household savings product. DeFi mass adoption needs the creation of a fully decentralized savings account that offers dependable APR.”
Anchor’s smart contracts receive stablecoin deposits and use a portion of them to acquire staking positions on compatible Proof of Stake blockchains. Users will receive their passive income from these staking rewards. The initial governance for this platform will come from the Interchain Asset Association (IAA), a newly formed organization that sees Zaki Manian of Cosmos, Jack Platts of the Web3 Foundation, and Do Kwon of Terraform Labs collectively steering the ship.
Telegram Is Set To Shut Down The TON Testnet By August 2020
Although Telegram has terminated its blockchain project, Telegram Open Network (TON), in May 2020, the TON test net has been apparently running for almost one year. In a July 6 update, the official TON development group on Telegram announced that it would be discontinuing its support of the test network for TON. Remaining TON validators will be turned off by August 1. In the post, the TON official recommended network participants save all their relevant data and stop their testing processes. Despite the testnet being set to shut down less than a month from now, network participants will still be able to continue their experimentation after the testnet is terminated. In order to do that, users can install their own testnet validators, described in greater detail in three different how-to documents containing guidelines for the Full Node, the Validator, and Test Grams.
Telegram launched the TON testnet for explorer and node software on Sept. 6, 2019. In anticipation of its scheduled Oct. 31 launch last year, the company released an alpha version of an iOS wallet to work with its native token, the Gram. But Telegram’s TON plans were never fully realized, as the United States Securities and Exchange Commission suddenly deemed Telegram’s $1.7 billion ICO illegal in mid-October. After a long-running legal battle with U.S. regulators, Telegram agreed to shut down its TON project, as well as return $1.2 billion to investors in line with a court-approved final settlement. As officially announced by Telegram CEO Pavel Durov, the firm had already reimbursed more than $1.2 billion by June 25.
Binance Supports An Ontology Upgrade
Binance, one of the world’s biggest crypto exchanges, has announced on July 5 that it will support the upcoming Ontology 2.0 network upgrade. Ontology 2.0 will include the integration of a number of community-led upgrades to its MainNet. Binance says that it will end support of Neo Enhancement Protocol 5-based, or NEP5, ONT tokens deposits. Any future deposits of NEP5 ONT will not be credited to users’ Binance account, it indicates. Deposits and withdrawals of ONT will be stopped starting July 6 at 9 a.m. UTC. Users will be notified when the Ontology upgraded network becomes stable and deposits and withdrawals are reopened, says Binance.
The Ontology network upgrade will not result in a new token creation and ONG staking rewards for ONT will not be affected. Ontology uses a dual token (ONT and ONG) model. ONT is the coin and can be used for staking in consensus, whereas ONG is the utility token used for on-chain services. MainNet ONT started to release ONG as soon as Ontology MainNet went live two years ago. According to Ontology, from 9 to 12th June 2020, it will give its community the opportunity to have a say in the development of its governance and staking economic model, especially for the Triones node results. However, The Ontology Foundation’s first three-year bonus to the top 49 nodes and the distribution method remains unchanged.