How Can We Trust Small Exchanges?
In the wake of the Binance hack, it is important to raise the question again of how safe are these centralised exchanges really? What was most shocking about the Binance hack is that Binance is recognised as a giant in the industry. But what about the litany of smaller exchanges that seem to routinely be scamming us or being hacked? In this episode of Crypto 101, Matthew Aaron had two separate small exchange spokespeople – CEO and founder of myCryptowallet, Jaryd Koenigsmann and CEO and co-founder of Agora Trade, Andrea Castiglione – to ask the question: ‘how can we trust small exchanges?’
myCryptoWallet is an Australian-based Crypto exchange that has been operating for about 18 months. They boast of their security and regulatory practices. From their own website:
“myCryptoWallet is an AUSTRAC regulated digital currency exchange that provides its users with the highest level of safety and security currently possible under international AML/CTF and KYC guidelines. All customers’ funds are held in offline cold wallet storage to minimise the risk of theft, and all new users must pass our rigorous Government Identity Verification checks before they can start trading. myCryptoWallet utilises the transparency of Digital Currency together with the power of Blockchain distributed ledger technology to make your wealth more secure and traceable than a bank vault.”
However, they are still a relatively small exchange, indicative of many smaller start up exchanges that are boasting regulatory compliance as a reason to be trusted. For Australia in Particular, a lot of this confidence comes from the Australian Digital Currency Association (ADCA).
So what is the ADCA and other regulatory bodies like them? It can get a bit complicated, and a regulatory body in and of itself does not necessarily assure trust — though it is a good first step.
“ADCA aims to encourage the responsible adoption of blockchain technology by industry and governments across Australia as a means to drive innovation in service delivery across all sectors of the economy.”
myCryptoWallet is not Gold Certified through the ADCA. Jaryd cited the fact that the independent audits were simply too expensive at this point in the young exchange’s life.
myCryptoWallet takes no fees on transactions and trades. Their only profit margins come from small percentages on the sale of what they are calling myCrypto Cards — cards that can be used like debit cards at any ATM in Australia.
The bottom line is still that myCryptoWallet is a centralised exchange which means they are a custodial crypto service. This means that users hand over their funds to myCryptoWallet and trust that they will be handled fairly.
CEO and co-founder of Agora Trade, Andrea Castiglione, explains the ins-and-outs of non-custodial de-centralised exchanges.
“When you want to exchange something, either you go to a centralised exchange or you go to a de-centralised exchange. The key difference is the way the people handle the keys. If you are on a centralised exchange – it could be Coinbase or Binance or any other centralised structure – what happens is your private key as a user gets stored onto the servers of be trusted party. So if a hack happens and someone hacks into the server, then they have access to all the private keys and they can move cryptocurrencies from one place to another.”
As Agora Trade is non-custodial they take a 0.4% fee on trades as their means of sustaining the platform.
Why Trust a De-centralised Exchange?
“We wanted to build a trustless infrastructure. So we want to be guild an exchange that doesn’t require trust between two parties. In order to do that we have to be protected by the code itself and by mathematics.”
All comes down to the term ‘non-custodial’. There are still risks of using a de-centralised exchange, the platform could crash, you are trusting your UI is representative of your actions etc. but the main security benefit of non-custodial services is that you always remain in control of your private keys and never have to hand over your funds in hope (trust) that they will be handled fairly.
If you want to hear more about the risks and benefits of these two exchanges (and thus their exchange types) check out the podcast.