The ripple effect of crypto exchange FTX going bankrupt has been taking a toll on the digital currency sector. Bitcoin prices saw significant volatility. Ether too has followed a similar path. And also not to forget that since November 6 (the day Binance CEO Changpeng Zhao said that his crypto exchange would liquidate its FTT tokens), the sector has seen a bloodbath of over $260 billion.
While the sector is also facing negative confidence levels from the investors, Sir Jon Cunliffe, a senior Bank of England official has now said that the crypto ecosystem needs tougher regulations to prevent another FTX-like episode, a sentiment which has been echoed by the policymakers of other countries as well.
Amid all this chaos, crypto exchange Genesis halted capital withdrawal, a move which sparked fears about the company’s future. However, it rubbished such rumours and said that the firm has no plans to file a bankruptcy plea.
If a Decrypt report is to be believed, decentralised crypto exchanges (peer-to-peer (P2P) marketplace connecting cryptocurrency buyers and sellers) and hardware wallet manufacturers (wallet containing the crypto user’s private keys in a secure hardware device) have reported huge profits in the last few days.
Hardware wallet manufacturing companies Ledger and Trezor got benefited from the consumers’ panic buying of self-custody solutions to safeguard their cryptos, given the fact that these wallets are almost immune from cyber-attacks.
Ledger CEO Pascal Gauthier, during an interaction with Decrypt, said that his company saw its highest sales week in 2022, especially after the FTX saga.
“Sunday was our single highest day of sales ever. Until Monday, when we beat our all-time high again. The message is clear: people are realizing that we must return to decentralization and to self-custody. ‘Not your keys, not your coins.’ A saying as old as crypto itself, but it has never been more relevant,” the official remarked, while talking about the sales week’s success, which Ledger witnessed in November 2022.
Trezor’s bitcoin analyst Joseph Tetek too said that the company had “indeed seen an exponential increase in sales since November 7.”
Also, another solution which hit the headlines recently is the decentralised crypto exchange alias DEX.
As per Dune statistics, DEXs accounted for $31 billion of crypto trades, amid the FTX crisis. Many such exchanges even saw a trading volume doubling in the 24 hours following the news of Binance liquidating its FTT tokens. Uniswap, a leading DEX, saw a business jump of more than three times (from nearly $1.3 billion to more than $4.2 billion).
Another Cointelegraph article stated that the price of Trust Wallet Token (TWT) has surged by nearly 150% after the FTX saga.
And yes, Binance CEO Changpeng Zhao’s endorsement of TWT’s parent platform, Trust Wallet, also helped the token to surge ahead. The token’s trading volume increased from 279 million TWT to 593.25 TWT amid the chaos in the crypto market.
TWT is basically a utility token for Trust Wallet, wherein traders can buy, sell and collect nonfungible tokens (NFTs), as well as exchange and stake cryptocurrencies.
While TWT operates as a centralized exchange token, Trust Wallet, on the other hand, enables users to control their own funds.
Reports also speculate the emergence of Trust Wallet as an off-ramp for traders, who are pulling their funds from crypto exchanges post FTX collapse, leading to the rallying of TWT prices.
With the hardware wallet manufacturers registering profits in the last few days, we will try to understand the ecosystems of cold wallet (under which the concept of hardware wallet comes) and decentralised exchange now.
A to Z of cold wallet
Cold wallet’s function is to store cryptocurrencies in an offline mode. Also known as cold storage, the solution is used on platforms not connected to the internet.
Not only individual investors, but crypto exchanges also use these cold storages as well.
Not only do these serve as safe storage for bitcoins and altcoins, but they also form a crucial part of the crypto security chain, as unlike conventional banking methods, a compromised wallet results in token theft, leading to a wealth drain kind of scenario. So having offline crypto storage makes sense here.
A bitcoin wallet is linked with the public and private keys of the crypto owner. Generally, storage methods also contain security mechanisms for these keys. The private key carries alphanumeric characters, using which the user can access his/her crypto holdings. The public key is similar to an account name/email address, which helps to locate the destination for the digital currencies being sent to the wallet. People trading in bitcoin share their public keys with each other and complete the transaction.
The commodity/service buyer sends the required number of bitcoins to the seller’s divulged address as payment, after which the blockchain verifies the transaction. After the payment is delivered to the destination address, the receiver then requires to use his/her private key to access the money. In case of the theft of this particular key, the user’s bitcoins/altcoins will be accessed without authorization. So the case of having a cold wallet becomes a strong one, just to save these private keys.
While another method of storing crypto is known as a ‘hot’ one, those wallets remain connected to the internet. Apart from being free, it doesn’t require the process of connecting the wallet online to implement the token transfer. However, cold wallets do have a crucial advantage in form of enhanced security.
Decoding cold wallets’ anti-theft mechanism
Since hot wallets remain connected to the internet, they are prone to hacking/network-based theft. This particular wallet generates and stores private keys and using the latter, digitally signs transactions and broadcasts them to the network. The problem with this whole process is that the threat actors can abuse the broadcasting part and get details about the private key.
Cold storage addresses the issue by signing the transaction with the private keys in an offline mode. Online transactions get transferred to the offline wallet kept on USB drive/CD/ hard drive/ paper/ offline computer. Then it gets digitally signed before another round of online transmission. Since the signing process happens in offline mode, hackers won’t be able to access the private key. However, the only drawback of the whole system is that it is a time and effort-consuming one.
Now, as we have discussed earlier, hardware wallet manufacturers have been registering profits recently after the FTX saga, they are very much part of the cold wallet ecosystem. Let’s discuss some of the prominent cold wallets to understand the whole concept in layman’s terms.
Paper Wallets
This is the most basic cold storage. It is a simple document, where private and public keys get written over. A bitcoin holder can print the above-mentioned document from the currency’s online paper-wallet tool, with the help of an online printer.
The paper wallet or document contains an embedded quick response code, scanning which further transaction-related steps can be performed. If you lose the paper or get it damaged, you won’t be able to access the address of your funds.
Hardware Wallets
This wallet uses an offline device or smart card to generate private keys offline. Prominent examples are Ledger USB, TREZOR and KeepKey. This device functions like a USB drive. To store your private keys offline, use a computer and a Chrome-based app. Also don’t forget to store the USB device and smartcard in a safe place, as damages to these entities will terminate your bitcoin access. While many hardware wallets are certified waterproof and virus-proof, some also support multi-signature (“multi-sig”) transactions (a crypto signature method that requires more than one user to approve a transaction using private keys).
Sound Wallets
These wallets encrypt and record private keys in sound files on CDs/ vinyl disks (records). These audio files also have hidden codes, which can only be decoded with a spectroscope application/high-resolution spectroscope.
Offline Software Wallets
These wallets are similar to the hardware ones, but complex. This one splits a wallet into two platforms (An offline wallet containing the private keys and an online one which has the public keys stored). The online wallet generates unsigned transactions and sends the user’s address to the receiver/sender. The transaction then gets stored in the offline wallet, where it gets signed by a private key. The signed transaction then goes back to the online wallet, which broadcasts it to the network. Electrum and Armory are the best in this category.
Now, let’s shift our attention to DEX. Talking about DEX, another crypto ecosystem component, which has gained tremendously post-FTX fiasco, is known for using the Ethereum blockchain. Decentralised crypto exchanges, such as Uniswap and Sushiswap have become integral parts of the decentralized finance (DeFi) tools, enabling a huge range of financial services directly from a compatible wallet.
These exchanges, by the first quarter of 2021, saw some $217 billion worth of completed transactions and by April of that year, there were over two million DeFi traders.
DEXs don’t allow exchanges between fiat and crypto as they do token trades. They act as a set of smart contracts, setting the crypto prices with the help of an algorithm and liquidity pools (entities where investors lock funds in exchange for interest-like rewards).
DEX transactions get settled directly on the blockchain. These exchanges are built on open-source code, enabling developers to adapt to the existing code and create new competing/rival projects. One prominent example here is which is Sushiswap and Pancakeswap following Uniswap’s code has been adapting pattern.
What are the benefits of using a DEX?
These exchanges offer a limitless range of tokens. Anyone can mint an Ethereum-based token and create a liquidity pool for it, so the users can find a greater array of projects.
Since the DEX trade-related funds get stored in the traders’ own wallets, the chances of them getting hacked are less. Also, these exchanges don’t ask for the personal information of their users, be it for trading or any other purposes.
Also, DEX’s features like peer-to-peer lending, speedy transactions, and anonymity made possible have made the solution a popular one in developing economies, in terms of meeting the financial inclusion goals.
Downsides
Dealing with these decentralized exchanges requires specialised knowledge. Apart from gaining a lot of expertise through intensive research, the users need to be careful against committing mistakes such as sending coins to the wrong wallets. Also, don’t go for experiments such as pairing a more volatile cryptocurrency with a less volatile one in a liquidity pool.
DEXs are a set of smart contracts and these contracts are coded. Any exploitable error/bug in these codes means an open invitation to the threat actors and subsequent token loss.
Another worry is getting scammed. Since DEXs offer a vast array of digital coins within their liquidity pool, chances of any of these tokens getting ‘rug pulled’ can’t be ruled out. The token creator can suddenly mint a bunch of new coins and overwhelm the liquidity pool, resulting in the coin getting depreciated and causing loss to the customers. Again deep research and expert advice are suggested here, when it comes to buying new cryptos on these exchanges.
Now, as this copy gets filed, reports suggest that Singapore is conducting a probe into Binance, over its involvement in the botched FTX deal. While the FTX exchange crash has created a crisis in the crypto market, the soaring profits of hardware wallet makers and DEX show that investors are now looking for a viable alternative to keep their money safe from external volatilities such as crypto exchange crashes.
You need a secure infrastructure for cold crypto storage
Despite a paper purse being one of the safest options for crypto investors, it doesn’t prevent physical data breach possibilities. Also, if there is a burglary at your home and your carbon wallet gets stolen, there goes your Bitcoin as well. So, one should go for a safe platform like ‘Bit Go’, which offers the best protection in the business for bitcoin storage.
Bit Go employs several security measures like dedicated hardware units, multi-factor identification, and custom risk assessment methods, to protect the bitcoin storage.
Another requirement of ensuring foolproof cold crypto storage is understanding the freezer storage needs and making crucial arrangements as per that roadmap. One must first confirm that the supplier is delivering appropriate capabilities as per the business needs.
For instance, some telecommunications companies provide multiple signatures, which enhance the safety of one’s digital currency-related operations. While some companies charge a fixed amount, others bill customers as a portion of the total transaction price. So understanding your needs and comparing various pricing structures is another crucial requirement as well.
Also, spend a few minutes reading evaluations of various suppliers. View user reviews, which will give you a better understanding of which telecommunications companies have a good reputation and which companies’ users should stay away from.
Crypto businesses understanding the safety game as well
Binance, the cryptocurrency exchange company, which used to be FTX’s rival, has recently announced the launch of a crypto asset store dubbed ‘Binance Mirror’ as investors return to the industry. Specifically targeting institutional investors, the solution will provide an off-exchange cold crypto storage solution to hefty investors so that their fear of losing their finances to data leaks or liquidity crises can be reduced.
Yes, with ‘Binance Mirror’, Binance is taking a positive approach to shift the focus of its crypto service to cold storage.
“Through Binance Mirror, institutions lock a certain amount of their asset balance available in their Qualified Wallet, Binance Custody’s cold storage solution, and mirror it to their Binance Exchange account with a 1:1 balance. Their assets will remain safe in their segregated cold wallet as long as their Mirror position remains open on the Binance Exchange, which can be settled at any time,” the exchange said in a statement.
The launch came at a time, when a Forbes report, citing a Chainalysis study, claimed that more than USD 3 billion was stolen in 125 hacks in 2022. This stat is more than a compelling one to make people move towards cold/offline storage.
And people are indeed moving to cold crypto storage. Glassnode noted that about 5,50,000 Bitcoins worth USD 9.2 billion had been moved to cold storage in 2022.
“Security is a top priority for institutions. We spent much of the past year fine-tuning operations to help our clients unlock the liquidity of their assets in our cold storage,” said Athena Yu, Vice-President of Binance Custody told Knownews.