In the next few months, there will be an influx of new crypto adopters who will want in, in the good thing that is happening around crypto. This is for the obvious reason of the bull run. With a huge influx of new users is the influx of a new set of scammers and hackers. Aside from the fact that their target will be individuals and innocent baby adopters, specific attention is going to be given to centralized crypto exchanges.
Hot and Cold Wallets
It is a good thing that many of the centralized crypto exchanges today have employed the safety net of cold wallets to keep funds safe. Hot wallets are easily accessible wallets connected to an exchange where instant withdrawals are processed. Hot wallets are simply online wallets or wallets that are connected online. Cold wallets are wallets kept offline from the reach of computers. A huge percentage of an exchange fund is kept in cold wallets. For a scenario where an exchange is hacked, there is a hope most of the exchange funds will not be touched since they are kept offline. Binance became one of the pioneers of cold wallets where funds are SAFU.
The Mishaps with Cold Wallets
Recent events however may have proven that even cold wallets might be at risk in some scenarios. An example was the sudden death of an exchange owner. He died without entrusting the computer password where funds are kept to anyone, not even his wife. Another is the recent event where one of the key holders to exchange funds had to cooperate with investigations. Withdrawals from the exchange had to be frozen. In events like these, even cold wallets might prove unreliable. But what does stay forever?
Ren Protocol as an Example
Ren protocol introduced a new concept to custodial wallets from its operation. It is a decentralized solution that entrusts the keys to nobody and everybody. This solution might prove reliable and great for centralized exchanges. On Ren Protocol, the key where funds are kept is broken up into bits, encoded, and shared between miners. These miners approve transactions to release funds and are incentivized with the withdrawal fees. To keep the network secure, the miners are required to stake some REN tokens. Therefore they are committed to keeping the network safe.
Can CEX use Decentralized Custodial Wallets?
This kind of decentralized system can be employed by centralized exchanges like Binance. Seeing that they have created two blockchains already is a plus and should make things easy. They can share the encoded keys to their hot wallets with miners and incentivize them with a portion of the withdrawal fees on the exchange to approve withdrawals. When systems like these have solidified, they can move to entrust them with 100% of the exchange funds. Models like these are secure just like blockchain itself.
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