Security measures in the Digital Exchanges
By the time we head off to know, how Digital Exchanges can be made secure? We should know the ABC of Digital currency exchanges!
Digital Exchanges are basically those online platforms, which allow one to exchange one kind of digital asset for another based on the market value of the given assets in real-time. Some of the exchanges, which gained massive popularity in the last few years, are Binance and GDAX. So now, you might have got an idea over, what exactly is a digital exchange? Further, it’s very important to know the fact that Digital currency exchange and Digital currency wallets or wallet brokerages are two different things. while Digital currency wallets or wallet brokerages allow easy purchase and sale of a limited range of popular digital assets (like Bitcoin and Ethereum), which can be thereafter used to be sent to a different exchange to trade for other digital assets like altcoins.
This statement is not limited to a certain limit, while most of the Digital currency exchanges usually restrict their users to trade digital assets with other digital assets; on the other hand, some digital exchanges allow trade of fiat currencies such as U.S. Dollars with the Digital currencies.
One of the best examples for such an exchange is Kraken, which basically accepts funds in the form of fiats like USD, JPY, CAD, and GBP, and facilitates trades with digital currencies like Monero, Ripple, Litecoin, Bitcoin and Ethereum.
How does a Digital Exchange work?
Do you find it difficult to understand, how do a Digital Exchange works? If Yes! Look no further, below context will surely help you to know all about the Digital Exchanges!
A Digital currency exchange generally comprises of a seller, who is looking to sell their Digital coins, which is called an order. These orders specify the quantity and price at which the buyer would like to sell the coin. All of these orders stored in a large ledger known as an “order book,” thus, if a buyer, seeks purchase of Digital coin, then he/she will be directed to the order book where he’ll be allowed to make a deal for a price and quantity satisfactory to him. And the case, he fails to find a deal, then he’s allowed to create his order.
Thereafter, the submission of terms and conditions from both ends, the exchange platform matches their order conditions with the order conditions of the buyer and then finally, the exchange is made.
During this whole process, a user generally encounters issues with the speed, i.e., the time lag needed to complete the exchange. At times it varies from a couple of minutes to several hours to several days to complete. There are basically two ways of speeding up this process, first is using an intermediary software and second is matching up the buyer and seller physically.
Amongst these twos, it’s always preferred to use an intermediary in the case of disputes breaking out. At least the third party can act as an arbitrator.
Advantages and Disadvantages of Using Digital Currency Exchange
Since every new technology which comes into the picture has its pros and cons, a similar thing is with the DEXs, which has some advantages as well as disadvantages.
Advantages of Digital Currency Exchange
• No central authority is holding operative power. It’s the people who run a DEX.
• Most of the DEXs do not charge fees, and if it does, then it’s very nominal.
• The absence of any central authority in the decentralized exchanges means no government interference
• Decentralized exchanges up bring more privacy.
Disadvantages of Digital Currency Exchange
• At times, completing a trade takes longer times, sometimes even days.
• Lower liquidity (depending on the exchange)
DEXs took security measures
Digital currencies so far are the best application brought up by blockchain, which is a decentralized ledger that holds complete detail about all the transactions ever made within it. A blockchain network primarily consists of multiple nodes called blocks, which keeps the information within it. Thus, in order to avail control over the network and tamper with transaction data, a hacker is required to crack all the nodes, which is practically impossible. So, you might be thinking that blockchain is as safe as houses, but, then why billions of people still afraid of hackers? The thing is that it depends on the security measures taken by the Digital currency exchanges.
If we look over the past hacks, we’ll be amazed to know that since the year 2011, there have been 31 attacks over the Digital currency exchanges with almost $1 billion stolen from two of them! Exchanges are so vulnerable because of the centralization, in which the digital coins are stored over the servers, which are easier to be hacked.
In this context, we will highlight the security measures implemented by the popular DEXs along with their vulnerabilities.
1. Dual-factor authentication (2FA)
One of the most common protection mechanisms, which are utilized by several social networks, websites, and financial institutions, is the Two- factor authentication (2FA). It means one needs to have a hold of two different authorization keys in order to log in to their respective digital account. Primarily, it comprises an alphanumeric code and the regular password. While one needs to remember the password, but, needs to follow up over the following two approaches to avail the code:
• Via message or call
If you avail this service, then you’ll be sent a combination of numbers to your Smartphone, tablet or any other device used by you.
• Via a specific app
There are some trusted apps, like Authy or Google Authenticator, where the Combinations will be displayed.
Among these two approaches, the latter approach is considered to be more reliable because these codes are timed to remain valid for a shorter period only. These Apps further makes sure about its effectiveness, that’s why generating combinations every minute or sorts. This makes uneasy for hackers to get access to the accounts, provided your phone is in a safe place. Further, one would not make an effort to break into the account with 2FA unless they are exactly aware of the amount stored in them.
2. Multi-signature and time-lock
This is another very useful feature being adopted by a large number of exchanges, in order to perform a transaction; users need to confirm it with their private keys associated with wallets. Usually, deals require only one key, But, as an extra security feature, some exchanges allow multi-signature confirmation which requires two and more keys to access their digital wallet. There are 2-of-2, 2-of-3, 3-of-5 Multisig addresses define how many signatures are needed for accomplishing a transaction.
Besides, the Multi-Sig, Time-lock is another feature that may look similar to Multisig but possess an additional security feature. With it, transactions can be accomplished after entering at least two keys/signatures within the prescribed time frame. The first key may be entered whenever you wish to but the second one is required to be entered after a certain period of time, which may be in the next 24 hours. In case, one fails to confirm the transaction with the second key; it will be canceled. Thus, hackers can’t spend the money even if they have access to your public key. While, we can easily see Multi-signature used by Coinbase, CEX.IO, Bitstamp is another popular exchange that uses time-locks as the security feature.
3. Cold storage
Over time, cold storage has been accepted as the most enticing feature being implemented by all major exchanges. While regular Digital coin holders are familiar with the storage of digital coins over the hardware devices, DEX websites are also using this method. Since hackers can’t compromise hardware which isn’t connected to the Internet, so users’ funds are secured and safe. The thing to be considered is that not all funds are stored offline because exchanges do have some closing orders and cutting trade volume in this case. Some of the popular exchanges that offer this feature are Binance, Coinbase, and Kraken.
4. KYC and AML
Know Your Customer and Anti-Money Laundering, are basically those policies which are implemented for fraud identification and prevention. Exchanges that follow the KYC/AML policy generally ask users to verify their accounts with the nationally accepted IDs, photos of bank cards, and sometimes documents proving residential address. Thereafter, DEX website’s compliance teams monitor transaction activities and may decline suspicious ones. While some Digital purists claim that KYC/AML contradicts the idea of anonymity, but the reality is that following these principles can be a very effective tool in preventing the fraud.
5. Insurance policy
Since risks are everywhere and if you are risking your money over the DEX platforms, then you should know how to reclaim the money back in case you lose them Thus, this security measure is though quite uncommon among exchanges as it can’t protect the website and traders from theft but acts similar to a compensation policy. Digital currency exchanges may budget for insurance expenses to hedge against the risk associated with sudden financial losses, external threats and software failures.
Summing up to these aspects, we may infer that DEXs are taking all security measures to keep its users’ money in a safe case. Hence, by adapting to 2FA, Multi-sigs, cold wallets, and other security initiatives, one can keep a better hold of their money.
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