As digital currencies have become increasingly popular in recent years, investors have found new ways to conduct business in the space. New startups, apps, modes of fundraising, tokens and currencies themselves have all entered the market at a rate that is sometimes astonishing.
The industry has changed quickly in its short history, and that has led many investors to be cautious when it comes to potential security risks. Founded in early 2014, Poloniex has emerged as one of the most important and polarizing names in the world of digital asset exchange, largely for its relationship with user and transaction security.
A Crypto-to-Crypto Exchange
What is Poloniex? And how does it relate to the broader world of virtual currencies? Put simply, Poloniex is a digital asset trading service. It is a type of exchange through which users can transact in different digital currencies around the world. In this way, Poloniex is very similar to any of an ever-increasing number of digital currency exchanges headquartered in various countries.
What makes Poloniex different from the way many other exchanges are structured, however, is the fact that it is designed as a pure digital-currency-to-digital-currency exchange. Users may only transact in cryptocurrencies.
In the case of some exchanges, users can buy or sell cryptocurrencies with or in fiat currency. This is currently not the case for Poloniex; all exchanges are done via other cryptocurrencies. Whereas most digital currency exchanges allow users to buy into a cryptocurrency with fiat currency of some type or another, with Poloniex, users must already own at least some quantity of one of the digital currencies on offer in order to participate in the exchange market. While this may seem on the surface to be a hindrance, many cryptocurrency users have nonetheless flocked to Poloniex for the variety of currencies that it includes in its list of offerings.
Poloniex has experienced numerous redesigns and expansions since its initial launch. The service now also provides technical analysis and user support in addition to its original trade functions, as well as an expanded range of trading features.
According to Poloniex.com, the exchange's online headquarters, Poloniex operates based on a volume-tiered, maker-taker fee schedule that was adopted in March 2016.
"The maker-taker model encourages market liquidity by rewarding the makers of that liquidity with a fee discount," according to its website. "It also results in a tighter market spread due to the increased incentive for makers to outbid each other. The higher fee that the taker pays is usually offset by the better prices this tighter spread provides."
In other words, the higher a user's trading volume over the previous 30-day period is, the lower the fees that user experiences. The maker-taker model, in use in a variety of types of exchanges throughout the financial world, aims to incentivize trades within a particular market. It does this by offering market makers an incentive to post orders, thereby facilitating trades. On the other hand, these models often are punitive for the customer on the opposite side of the equation. In the case of Poloniex, the added benefit of the increased liquidity and more optimal market spread is designed to balance against the higher fee which is charged to the taker.
Security, Insolvency, and Hacking Concerns
As with most cryptocurrency exchanges, Poloniex has made it a priority to guarantee that users experience safety and security while transacting. As such, Poloniex ensures that "the vast majority of customer deposits are stored offline in air-gapped cold storage. [The exchange] only [keeps] enough online to facilitate active trading, which greatly minimizes risk and exposure" to hackers and other threats.
Besides that, the exchange maintains vigilant monitoring and auditing systems which work to protect user assets around the clock. Even with these security measures in place, though, there have been user concerns regarding Poloniex's security and solvency.
In the summer of 2017, for instance, a rumor circulated among users that Poloniex was experiencing insolvency. The source of the rumors was difficult to track, but Coin Telegraph reported that at least one user experienced a significant personal financial loss as a result of hacking, and the user reportedly did not receive prompt assistance from the Poloniex support department.
Other issues, including frozen accounts and disabled withdrawals, also fueled the insolvency rumors. The slowdown in customer support and reduced functionality suggested to some that the increased demand on Poloniex from a growing user base might have overwhelmed the system. Since early in 2017, when those issues were first reported, Poloniex has continued to be plagued by user concern regarding transaction processing time, transaction completion, and more. On the other hand, Poloniex has so far not experienced major security breaches, which remain a major concern among cryptocurrency investors and for digital currency exchanges more broadly. The slowdown has also impacted the account creation process, and Poloniex acknowledges that it may take weeks for a user to successfully create a new account.
Some took this to mean that Poloniex was prepared to not distribute bitcoin cash to those Poloniex users who held bitcoin at the time of the hard fork. Accordingly, a healthy dose of skepticism remains. (See also: Bitcoin and Altcoins: Are There 2 Crypto-Bubbles?)
As recently as January of 2018, Poloniex users reportedly experienced isses related to customer account balances in the exchange platform. Perturbed users suggested that the exchange was not properly crediting user account balances when those users canceled orders through Poloniex. In response, the Poloniex team addressed the issue via Twitter, announcing that it would investigate any complaints related to canceled orders not being refunded. A report by Coin Telegraph suggests that at least some of the users that experiened account balance issues saw their balances adjusted to the proper level following the investigation.
While Poloniex and other digital currency exchanges have it in their best interest to keep customers happy and accounts and transactions processing smoothly, even a single misstep or inaccuracy can greatly compromise an exchange's reputation. One Poloniex user has reported waiting more than 5 months for an order to completely process, in spite of numerous attempts to reach the Poloniex customer service team in order to address the issue. In some cases, customer patience may be worn quite thin as a result of the expectation of a fast-moving and seemless transaction process in the cryptocurrency space. On the other hand, highly publicized stories of some cryptocurrency exchanges collapsing or mysteriously losing large quantities of money may put Poloniex users on edge as well.
Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest incryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns cryptocurrencies.