If you’re either (a) Canadian or (b) into cryptocurrency trading, you’ve probably heard about QuadrigaCX.
The story goes something like this. QuadrigaCX was operated out of the Halifax home of its sole director, Gerald Cotten. Cotten died of Crohn’s disease in December, at which point knowledge of all the exchange’s private keys were lost. As a result, Quadriga lost access it cold wallets, which reportedly hold up to $137M USD worth of cryptocurrency.
News of Cotten’s death has led to widespread speculation on whether or not Cotten’s death was part of an exit scam. Here’s what the CEO of Kraken, a popular US exchange, had to say.
Exit scams are not a new phenomenon in the cryptocurrency space, especially after the ICO craze of 2018. In November 2018, Pure Bit project ran off with 13,000 ETH raised in an ICO. In January 2018, Prodeum promised to create a database of fruit and vegetables on the Ethereum blockchain, but instead ran off with 5,400 ETH. deadcoins.com maintains a database of scam ICOs, which had 182 entries as of this writing.
Returning the Quadriga case, what we do know for certain that is lost coins rightfully belong to Quadriga’s customers — cryptocurrency traders that had ceded custody of their coins to the Quadriga exchange, in order to trade on the exchange. This is the inherent risk involved in custodial trading — to trade on the exchange, you must first trust the exchange with your coins.
This week, 18 different lawyers appeared before a Nova Scotia judge, seeking to represent Quadriga’s customer in a class action lawsuit against the exchange.
Lawsuits are one way you can protect your coins. Arwen is another.
How Arwen Prevents Exit Scams
What would happen if you were trading with Arwen on an exchange that suddenly went offline, became unresponsive, or lost access to its wallet?
With Arwen, your coins are never at risk.
This is because Arwen is a non-custodial trading protocol. With Arwen, you don’t need cede custody of your coins to the exchange in order to trade. Instead, you deposit your coins in on-blockchain escrows, where the agent of escrow is the blockchain itself. (So, when you escrow bitcoins, the agent of escrow is the Bitcoin blockchain.) These escrows protect your coins in case the exchange goes offline or gets hacked while you trade.
This is in stark contrast to the status quo of custodial trading on today’s centralized exchanges. On a centralized exchange like QuadrigaCX, you must first deposit your coins in the exchange’s wallet before you can trade on the exchange. That means that if the exchange loses access to its wallet, your deposit is lost as well. Hence the 18 lawyers seeking to represent the traders that lost coins when Quadriga lost access to its wallets.
Meanwhile Arwen safely ensconces your coins in on-blockchain escrows, instead of inside the exchange’s wallet. Arwen escrows protect your coins even if the exchange becomes unresponsive or loses access to its wallet.
Arwen Security Assumptions
The security of the Arwen Trading Protocols follows from two key assumptions.
- Closing escrows on time. Each Arwen escrow comes with an expiry time. Arwen protects your coins as long as you remember to close each escrow before it expires.
- Coming online during the coin recovery period. If you engage in a trade with the exchange, and the exchange improperly aborts the trade (i.e. attempts to run off with your coins in the middle of a trade), your Arwen App will detect this misbehavior and notify you. You Arwen App will then tell you about a “coin recovery period” — usually a 24 hour period — during which you will need to connect your Arwen App to the Internet. Your Arwen App will then recover your coins during this coin recovery period. (The coin recovery period is only relevant if the exchange improperly aborts at trade.)
You coins are not at risk as long as you remember to do 1 and 2 above, even if the exchange is compromised, or attempts to run off with your coins.
(If you forget to do 1 and 2, you coins are still safe as long as the exchange is not compromised.)
The mechanics of coin recovery with Arwen
Suppose that an exchange becomes unresponsive, or loses access to its wallet. Let’s walk through the mechanics of how Arwen protects your coins.
If an exchange became unresponsive, you could not open new escrows with that exchange, or execute trades with that exchange.
But, any coins you have locked in existing escrows would be safe. This is because your Awen App can unilaterally close any of your escrows, even if an exchange is unresponsive. The key word here is unilaterally — that is, your Arwen App can close your escrows even without the exchange’s help.This holds even if the exchange is offline, unresponsive, or malicious.
Unilaterally closing Arwen escrows
Arwen has two kinds of escrows.
An exchange escrow is an escrow funded by the exchange. The exchange escrow proves that the exchange has sufficient collateral to back any trades you make on the exchange. Your Arwen App will always be able to close each of your exchange escrow before it expires, even if the exchange refuses to participate in closing the escrow.
A user escrow is an escrow funded by the user. You deposit your coins in a user escrow in order to collateralize your trades. If you try to close a user escrow before it expires, and the exchange refuses to cooperate in closing the escrow, your coins are still safe. You Arwen App will unilaterally close your user escrow any time after the escrow expires — you will just need to wait until the expiry of the user escrow to get your coins back.
In a few days, our team at Arwen will be pushing out a version of our testnet app that lets you try out various coin recovery scenarios.
The promise of non-custodial trading
Today, we still live in a world where the vast majority of cryptocurrency trading requires traders to trust a centralized cryptocurrency exchange with custody of their coins. The Quadriga case illustrates that some centralized exchanges are not worthy of this trust.
Arwen seeks to change this status quo. With Arwen, traders can enjoy the liquidity and speed of at a centralized cryptocurrency-to-cryptocurrency exchange without trusting the exchange with custody of their coins. Instead, Arwen trader deposit their coins in on-blockchain escrows, where each coin’s native blockchain acts as the agent of escrow.
And if the exchange goes offline, loses access to its wallet, or attempts to steal the trader’s coins, the trader’s coins are never at risk. This follows because the Arwen Trading Protocols allow the trader to unilaterally recover coins from her escrows, on her own, without any assistance from the exchange.