Bitfinex and the Whipping Boys of Crypto

Instead of hating on exchanges today, it would do to remember yesterday, and consider tomorrow.

One of the biggest cryptocurrency exchanges of the world came under attack over the past couple of weeks. The attack vectors are two-pronged. The primary attack was a DDoS, which got subsequently worse, said Bitfinex. The second attack vector is just as damning, and it poured in from the media, and community itself.

‘Slammed to the mat by DDoS attacks’, ‘Traders frustrated’, ‘Stole My Deposit’ and on and on went the tirade. The headlines have been loud, the trading forums chaotic.

The Pain is Real

There have been an estimated 16 major breaches over the last six years alone, with over $33 bn worth cryptocurrencies stolen or gone. The risk is real, and so, therefore, is the pain. A trader is excited by the opportunity in volatility, the opportunity to make 50% or even 100% returns, but he also fears an attack which always seems imminent.

But the trader’s fear is nothing compared to what the lenders go through. The wellspring of liquidity in the system, a lender is looking for the least risk, but ends up getting burned the most in the instance of an attack. This is why the Annual Percentage Rate for a loan could go up to 30% to 50%.

Bitfinex has done much to even things out in such circumstances. They’ve issued BFX tokens to those who’ve lost and repaid them with the fees they earn. In some instances, they’ve even distributed the losses among existing users. It all messes with you, to say the least.

Does that mean all the noise is warranted?

But is it Fair?

The criticism can get a bit over the top sometimes. Pic: imgflip.com

It would do to remember that -

  1. Centralized exchanges are the frontrunners for trade in cryptocurrencies. They got the ball rolling.
  2. Without them, hodl is all you can do. No trading, no playing with margin funds, nothing.
  3. The user experience is unmatched in anything else we’ve seen so far. Whatever your trading strategy, you can make it happen here.
  4. Today, they are the ONLY means of executing complex financial instruments with cryptocurrencies.
  5. They are centralized, i.e., an anti-thesis to a core aspect of the blockchain. What did you think would happen?

Crisis Fuels Innovation

This crisis is part of a pattern of innovation in the community. Every time something bad happens, it tends to focus the community’s attention and considerable genius to solving the next big problem. Consider this sequence -

A series of hacks and crashes, beginning with, say, Mt. Gox, then Bitfinex and so on. >> The beginnings of a decentralized ecosystem. >> The invention of relayers. >> Beginnings of a shared liquidity pool.

When Cryptokitties choked Ethereum, the community converged on scaling, put its shoulder against incredible, distinctive approaches — notably Plasma, Truebit and Cosmos. Several other interesting approaches include horizontal blockchain communication a la Oracles POA Network.

This particular crisis too, I believe, will be the fulcrum of something new, conceivably a hybrid solution that does away with the vulnerabilities of centralized exchanges.

Growing Pains

People intimidated by the blockchain fell in love with virtual kittens. For all of crypto’s mainstream dreams, centralized exchanges are the first port of call.

In a major step towards legitimacy (or widespread adoption, if you will), the Chicago Mercantile Exchange has begun to trade Bitcoin futures. A portal is beginning to open between Fiat and crypto. When the reverse — the blockchainization of securities and conventional asset classes — happens, it’s safe to assume that the new asset classes won’t dive into an unfamiliar, decentralized system. They’re going to want to land in an environment they’re comfortable with — a centralized exchange.

Whichever way the ecosystem evolves, the quest for decentralization must be on a path that would include the spectrum of services and ease of use that centralized exchanges today provide. In order matching and user experience, for instance, Bitfinex is peerless.

Ahead, Together?

It behoves the community to figure out a way in which this awesomeness is preserved. What should obviously not be preserved is the practice of having to hold people’s funds in central repository.

This is what a few ‘blockheads’ in the community, including Lendroid, are working on. Well, more power to them.

Meanwhile, perhaps we could stop with hating on exchanges. The solution isn’t to switch from one exchange to another, either. When shooting oneself in the foot, what gun you use doesn’t much matter.

The true solution is likely a hybrid. A bridge between centralized and decentralized exchanges. Does the key lie in cross-chain communication? A radical, partly decentralized version of Bitfinex?

One thing’s for certain. It’s on the way, and it’ll finally set the blockchain free.