The cryptocurrency market has grown to previously unimagined heights in 2017, topping out at nearly $180 billion in total market cap this summer. The growth has been rapid and widespread, with a slew of new digital currencies, related startups, and exchanges entering the field each week. As investors and speculators have become increasingly interested in the area, hackers and criminals have also taken note. The more money there is in the cryptocurrency space, the more incentive there is for criminals to try to take advantage of investors pouring their assets into it.
The result has been, in part, an increase in the number of hacking attempts focused on cryptocurrency exchanges, those central hubs where investors exchange assets and which typically hold millions of dollars of funds at any given time. (See more: Can Bitcoin Be Hacked?) Now, a new type of digital currency exchange is emerging, and investors are hopeful that it might help prevent hacking thefts.
Decentralized Exchanges Reduce Likelihood of Coin Compromisation
While many traditional cryptocurrency exchanges store private keys for users on central servers, these have become increasingly susceptible to hacks. If a hacker gains access to a user's private key, he can access that user's cryptocurrency wallet and easily transfer the contents to his own secure account. Decentralized exchanges, on the other hand, do not store any coins or private keys on central servers, according to a report by bitcoinist.com. Thus, hackers have to work significantly harder to track down these assets and the passwords which protect them.
EtherDelta is a decentralized exchange which has emerged as a popular option among security-minded digital currency investors. The exchange features a daily trading volume of more than $4 million. There are a growing number of other decentralized exchanges as well.
Issues With Decentralized Exchanges
On the other hand, there are some potential problems with decentralized exchanges. John McAfee, the technology security expert, recently wrote an article suggesting that decentralized exchanges could be a problem for government regulatory agencies, as these exchanges make it more difficult to trace funds for the purpose of taxation. Perhaps this is part of the reason why governments like China and South Korea have recently made moves to regulate cryptocurrency exchanges. (See more: China's 'Zero Tolerance' Policy on Cryptocurrency Crimes.)
The balancing act between individual user anonymity and security, protection from potential frauds and hacks, and government control will likely continue for some time. Individual countries have adopted different responses to the growing cryptocurrency phenomenon. For the time being, however, investors who are concerned about digital currency theft may wish to explore their options within the decentralized exchange landscape.