Elon Musk wants you to stop relying upon cryptocurrency exchanges; here’s the reason
There are two types of crypto exchanges — centralized and decentralized — both come with their own benefits and pitfalls in terms of safety and reliability.
Tesla CEO Elon Musk is not endorsing any centralized cryptocurrency exchanges. Musk, who is a staunch supporter of cryptocurrency, wants crypto holders to take custody of their ‘keys’, and not rely upon cryptocurrency exchanges such as Robinhood or Binance.
This became clear after a recent Twitter spat between Musk and Binance CEO Changpeng Zhao. The billionaire investor and founder of SpaceX raised concerns on behalf of Dogecoin holders regarding the recent DOGE problem at cryptocurrency exchange Binance. The issue resulted in numerous erroneous dogecoin transactions with some users reporting that their accounts were frozen.
Musk asked Zhao (CZ), “What’s going on with your Doge customers?” adding that, it “Sounds shady.”
Recently, Musk had also responded to a tweet by Bill Lee, an investor in Musk’s ventures, agreeing that until the wallet keys are in the user’s possession, they should not consider the holdings as “their own”. The Tesla CEO wants people who own digital assets to own their own private keys rather than letting a crypto exchange handle it. Here’s why.
Types of crypto exchanges
The safety of cryptocurrency depends largely on which cryptocurrency exchange you use. A cryptocurrency exchange is an online marketplace where users buy, sell, and trade cryptocurrency. It works similar to an online brokerage, as users can deposit fiat currency, and use those funds to purchase cryptocurrency online.
There are two types of crypto exchanges — centralised and decentralised — but both come with their own benefits and pitfalls in terms of safety and reliability.
If you are keen on using a centralised cryptocurrency exchange such as Binance, WazirX, CoinDCX etc, you would be availing the services of a company that facilitates crypto to crypto and crypto to fiat transaction between two or more individuals.
Such exchanges ask their users to submit Know-Your-Customer (KYC) documents while registering on the platform. After signing up, users can deposit money and buy or sell crypto coins. At that point, the exchange gets custody over your digital assets as well as your ‘private keys’.
It is worth noting that digital currencies such as Bitcoin, Ethereum or Dogecoin, are stored in something called a ‘wallet’, which can be accessed by using your ‘private key’ — the crypto equivalent of a super-secure password — without which the crypto owner cannot access the currency.
In addition, centralised exchanges do not provide you a private key to the funds, but rather take access to your keys. So when you want to trade or make a transaction, the exchange authenticates it on your behalf, and based on your instructions. And when a crypto trade goes through, the exchange generally edits the balance in the accounts of the two parties to reflect the transaction on their app or website.
This means a large amount of customer data, including private keys, is stored with these exchanges — while crypto exchanges claim that the data is secure there have been cases where hackers have stolen crypto assets worth millions of dollars. In August, for instance, a hacker stole $613 million in digital coins from token-swapping platform Poly Network. While the company claims hackers behind the heist have now returned nearly half of the tokens they stole, in the world of cryptocurrency, there are no guarantees.
Incidentally, decentralised exchanges (DEXs) do not store private keys of customers, making any hacking attempts ineffective. Transactions are peer-to-peer, and settled between two individuals.
DEXs allow users to trade cryptocurrency across wallets. Transactions on DEX are executed on a blockchain, like Ethereum, Binance Smart Chain, etc, making them transparent. Moreover, there is self-custody of funds on a DEX, as users transact using their own wallets, retaining custody of their digital assets.
Safety of ‘Keys’
A crypto wallet stores the private keys that give the user access to their cryptocurrencies — allowing one to send and receive cryptocurrencies like Bitcoin and Ethereum. It should be noted that your coins are stored on the blockchain, and the private key is required to authorise transfers of those coins to another person’s wallet.
The safety of wallets depends on how the user manages them. The biggest danger in cryptocurrency security is the individual user perhaps losing the private key.
Online wallets are the easiest wallet to set up and use but are also the most susceptible to cyber-attacks. One way to secure your cryptocurrency is to use an offline wallet instead of the online one.
Offline wallets — a paper or hardware wallet, can be operated either through your desktop, mobile, or specifically designed hardware. However, when you do use an offline wallet, make sure you enable multiple levels of authentication before being able to access your crypto holdings.
Unlike centralised exchanges, decentralised exchanges do not provide a user-friendly experience, and are quite complex to operate. It is also because in the case of decentralised exchanges users have to first connect to their crypto wallets which becomes a tedious task. While the majority of transactions occur on centralised cryptocurrency exchanges, in terms of preventing market manipulation and less hacking risk, decentralised exchanges are the best.