Canadian exchange QuadrigaCX’s CEO Gerald Cotton died while traveling, in December 2018. They later released a statement saying the crypto tokens in their cold wallets – which are maintained to keep the tokens safe from hackers – were not accessible because the keys were with their CEO, and only he had access to them.
“Cold wallets, by their nature, are highly encrypted and were kept off the QuadrigaCX server for security reasons. Gerry took sole responsibility for the handling of funds for QuadrigaCX and as such no one other than him can access the coins in the cold wallets”, a statement by the company said.
Many termed this as an exit scam and many compared this to the famous Mt. Gox hack even as it was followed by New Zealand’s exchange Cryptopia’s hack. The trend continues and the investors are completely blind about where these funds are being held or channeled.
The touted solution to this is Decentralised exchanges. Exchanges like Idex and the latest decentralised exchange by Binance have cropped up with the promise of providing users with custody of their own funds. Idex has been operational for quite some time and it seems their solution to security is solid but has led to another problem – scalability and bad user experience.
Idex works on Ethereum chain but there is a lack of liquidity because the Ethereum blockchain cannot scale currently. There are also minimum order requirements for trading since Gas fees on Ethereum chain are high. Binance claims to solve the problem of scalability but there are inherent challenges that we are yet to see.
There is a Different Approach
Meanwhile, a Boston-based startup has been quietly working on a solution that allows users to maintain custody of their funds while trading on a centralized exchange. This is a solution that can be plugged into centralized exchanges. It is called Arwen.
Co-founded by Sharon Goldberg, who is an associate professor of computer science from Boston University, a Ph.D. From Princeton, have won several awards and has been researching on securing protocols that form the core of many internet protocols. Her Co-Founder and CTO is Ethan Heilman, who is credited with many papers on cryptocurrency and blockchain security. One paper by Ethan broke the security of the SHA-3 candidate Spectral Hash.
They have built Arwen as a Layer 2 solution for securing digital assets from centralized exchanges by locking a user’s tokens in a blockchain-based escrow. Arwen will be integrated with exchanges so they can lock the tokens to be traded in the escrow too. This way centralized exchanges can be used to trade without having to give up the custody of tokens to the exchange. When the order is hit, the trade will be executed in the escrow and the tokens will be exchanged. This way, the exchange never gets the custody of a user’s tokens and if it is hacked or goes bankrupt, the tokens can still be claimed by the users from the escrow.
This is a completely different approach compared to decentralized exchanges. KuCoin is the first big exchange to partner with Arwen. It currently supports trading of BTC, BCH, and LTC. It will add support for ZEC, ETH and other ERC-20 coins in the future.
Compared to decentralized exchanges, Arwen makes sure the centralized order book has more liquidity, trades tokens through fast, cross-chain token swaps while providing custody to the users.
What remains to be seen is how many exchanges adopt this. Arwen’s customers are exchanges instead of end-users because exchanges have to integrate with it first. Binance has already launched its DeX and is unlikely to go for a Layer 2 solution for custody. While decentralized exchanges try to improve their user experience and liquidity, Arwen’s success will depend on its pace adoption by exchanges and the end user experience.
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