With a consistent flurry of hacks, thefts, and other worrisome attacks directed against various exchanges and the much-hyped DAO, there is a growing feeling in some quarters that all is not right in the world of cryptocurrency. That feeling is being reinforced by seemingly inconsistent responses to cryptocurrency holder losses, and a growing sense of unease about how many of these issues will play out in the coming months and years. With exchanges this vulnerable, and the response to theft so unpredictable, it’s well past time someone made an effort to provide some sense of security.
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Let me begin by noting that I am not really sold yet on decentralized exchanges. That is not to say that I will not eventually be convinced of their utilitarian benefits, but I’m just not there yet. However, in the wake of recent events in the digital currency universe, it is becoming increasingly difficult to just dismiss that exchange model out of hand. And while many of those who advocate for decentralized exchanges do so due to concerns about things like market manipulation, it is also easy to see how some might argue that such an exchange may simply be the best of a number of bad options. More on that later.
It’s starting to feel like we all need a vacation from history for a while. If 2016 has taught us anything at all, it is that all of those people who have spent years complaining that the “system” is rigged against them just might have a point after all. I’ve never been one to flirt with pessimism as a worldview, but there have been times over the course of the last eight months or so when I can certainly feel the gravitational pull of all that doom and gloom. At times, it seems as though there’s something wrong with just about every system out there. Politics. Economics. Media. That Windows 10 Microsoft tricked me into downloading. The way my dogs walk in circles before plopping to the ground. You name it; it just all feels broken.
Oh, you can deny it. You can look at our political system and say “well, sure – in a nation of 320 million people Donald Trump and Hillary Clinton are clearly the two best candidates for President that we could find.” And when you get done saying that, you can pass me a glass of whatever it is you’re drinking so that I can get a head start on joining you in that drunken line of reasoning. You could also look at our economic picture and just declare it the least crony-ridden system you’ve ever seen – and then offer me a second glass of that beverage. We won’t even bother addressing the media or that lovely operating system, since by now neither one of us is likely to believe even our own attempts at optimism.
As for my dogs, I’m long past trying to explain why they do anything that they do. Sigh.
Of course, before we’ve consumed enough of that liquid mind-cleanser to render us completely incoherent, we should probably put another bit of optimism to rest as well. In this case, I’m addressing that oversized elephant in the room that none of us really want to have to deal with because it requires questioning some very basic assumptions that we’ve all had when it comes to digital currency and how it could change the world for the better. It all comes down to being too big to fail, and how that very concept was once seen as being a driving force behind the move toward decentralized currencies.
Most of us are old enough to remember the near-meltdown of the world financial markets less than a decade ago. We all remember the panic that set in throughout the financial world and the political class, as the people in power and their chosen political lackeys – is that politically correct? – told us repeatedly that all of those financial giants were simply too big to fail. If we didn’t bail them out, then banks would collapse, small depositors would lose their life-savings (call it a lie; call it spin; any propaganda port in a storm, I suppose), and the world would come to a crashing halt. Economies would collapse, dogs would begin to marry cats, and the dead would rise to usher in the zombie apocalypse. Or some such nonsense.
In any event, none of those claims were tested because the big money interests received the big money bailouts they were demanding, and big money businesses continued on as they had for many years. Except that they really didn’t. After receiving hundreds of billions of dollars in taxpayer bailouts, the banks and other financial companies gave thanks to the taxpayers by throwing a few lavish parties, divvying up some of that money and doling it out as bonuses to their executives, and then spending the next several years denying consumers and small businesses the loans they needed to restart the economy that the elites nearly destroyed.
Digital currency was supposed to – at least in some small measure – be a response to all of those excesses and “too big to fail” inequities. And for a time, it seemed as though that would be the case. There were rough patches, of course. The Mt. Gox fiasco is one of the most glaring examples of just how rough things could get. But throughout those rough patches, one thing was pretty clear to almost everyone who was paying attention: the people making all of this happen really were committed to the principles they espoused. The blockchain was immutable. Money was being democratized.
In recent months, however, some of those old assumptions have been called into question time and time again. The DAO was hacked and tens of millions of dollars’ worth of Ethereum were stolen. That was a horrible crime and it was certainly understandable that many in the Ethereum community were on board with the idea of ignoring the immutability principle in favor of regaining the lost coins and the wealth that they represent. Nevertheless, the decision to execute a hard fork was a break with that principle – and it gave many observers reason to doubt one of the most oft-repeated benefits cited by digital currency advocates as they try to convince a skeptical world to trust the technology.
More recently, we have the Bitfinex heist of tens of millions of dollars in Bitcoin from its exchange. That theft – which the exchange assured us was not a hack – resulted in a temporary suspension of exchange activity as the people involved in its operations attempted to come up with a plan. After some initial statements that indicated that the exchange would strive for a “socialized loss scenario” that would have basically had those who held Bitcoin in the exchange eat the losses. That, of course, makes sense if you’re interested in socialized anything; if socialism is good at anything, of course, it’s good at spreading pain and misery in equal measures.
More recently, we have the Bitfinex heist of tens of millions of dollars in Bitcoin from its exchange. That theft – which the exchange assured us was not a hack – resulted in a temporary suspension of exchange activity as the people involved in its operations attempted to come up with a plan. At first, there were some initial statements that indicated that the exchange would strive for a “socialized loss scenario” that would have basically had those who held Bitcoin in the exchange eat the losses. That, of course, makes sense if you’re interested in socialized anything; if socialism is good at anything, of course, it’s good at spreading pain and misery in equal measures.
In for a penny, in for a pound, right?
So, how will all of this work for those Bitfinex customers? To start with, the company has announced that every customer with holdings on the exchange will be the lucky recipient of a 36% loss in those deposits. To make up for that little bit of fairness, those customers will receive compensation in the form of tokens that they might at some point in the future be able to redeem for shares in the company that lost their money in the first place. Maybe the exchange will throw in a set of cheap steak knives to sweeten the deal.
Apparently, the token – which has the label BFX – is there to serve as a record of what the customer lost in the heist. That is actually quite thoughtful if you think about it. As someone who has experienced the frustration of having had his bank account hijacked and siphoned, I can understand this line of reasoning all too well. I mean, sure – I wanted my money back and worked with the bank to try to accomplish that feat. Looking back now, though, I probably would have been satisfied if my banker had just given me a wooden nickel with an engraved record of just how much the theft cost me. Especially if he told me that I might possibly-maybe-someday-if-everything-goes-just-right eventually be able to trade that in for a share of the bank. You betcha.
With the DAO we saw a collection of digital assets get hijacked from investors who were apparently too big to fail. With Bitfinex, we see an exchange that loses even more money than the DAO - but those who lost their holdings are apparently too small not to fail. Yes, we all know that some of this is risky business, but is there anyone out there who doesn’t see this lack of consistency as a problem? Is there anyone out there who isn’t at least somewhat disturbed by the idea that big investors – like big banks – get bailed out when something goes awry, while smaller traders and investors are left to share in the misery that a huge theft of assets invariably creates? Isn’t anyone else reminded of the housing and financial crisis of 2008? Big finance was bailed out. Homeowners who found themselves in dire straits? Not so much.
Here’s the thing: I’m not sure if a decentralized exchange will ever do all that some people seem to think that it could do. It’s pretty much a given at this point that any notion that such an exchange could be used to transfer digital assets to fiat currency will likely remain a pipe dream for the foreseeable future. Then again, at this point that probably doesn’t even matter. Right now there are a lot of cryptocurrency fans and advocates who feel that the current system is rigged in favor of those who are too big to fail – and those people all want assurances that someone is going to ensure that this playing field is at least somewhat level.
Are decentralized exchanges that avoid having large deposits of assets sitting in one place the answer to this problem? Maybe. I’m certainly not capable of answering that question with any degree of certainty. What I do know, however, is what I see and hear with my eyes and ears – and what I see and hear is a whole lot of frustration that will eventually turn to anger if something isn’t done to correct these problems. A few more instances like these, and the digital currency community is going to be fighting a two-front war for trust and acceptance. Right now, we’re trying to convince the world that cryptocurrency can do everything that we say it can, in a fair and transparent manner. If that creed doesn’t look like it’s actually being taken to heart by everyone in the community, then it’s going to be an even tougher sell to the broader global audience.
So, it’s well past time that standards were put into place so that users know what to expect when something like the DAO or Bitfinex – or any of the other hacks and thefts and inside jobs we’ve seen in recent years – happen again. Because this type of thing will continue to occur until action is taken to change the current exchange paradigm or somehow prevent theft. Provide a better way to protect the holdings in these exchanges, create reasonable policies to govern how companies respond to these incidents, and demonstrate some consistency and fairmindedness about how you treat different classes of traders and investors. As things stand right now, decentralized exchanges are starting to look more and more attractive.