Here we go again: A top centralized crypto exchange (CEX) was hacked, this time likely for the largest sum in humanity’s history. We were lucky to avoid the worst — platform collapse and devastating consequences for the industry. The incident reminded us again that even the strongest market players are not invincible.
CEXs’ freedom to manage customer funds comes with risks, reminding users that good old non-custodial storage is still the safest. With recent advances in security features, wallets safeguard coins and help users safely make the most of their crypto.
Golden rules never rust
After the $1.5 billion Bybit hack, things settled down quite quickly. If the platform didn’t keep reserves of 1:1 for client funds, however, the hack could have dire consequences for the entire industry. When FTX’s liquidity problems surfaced in 2022, a bank run killed the platform in days, and billions of repayments are only just starting.
Historically, CEXs have been a primary target for hackers. Between 2012 and 2023, centralized exchanges fell victim to 118 hacks, losing almost $11 billion. This is 11 times more than money directly stolen from blockchain networks and cryptocurrency wallets. Again and again, we see how vulnerable crypto market titans can be. The golden “not your keys, not your Bitcoin” rule remains highly relevant.
Making a centralized crypto exchange deposit means delegating the storage of your money. CEXs keep all private keys and hence have complete control over customers’ funds. Besides a smooth trading experience, this entails a few unpleasant consequences.
First, centralized platforms store substantial amounts in a few wallets, making them a frequent target for hackers. CEXs use cold wallets and multisig transactions, which is supposed to be an ultimately secure method. This framework, however, relies on third-party infrastructure to merge signatures, and these systems turned out to be vulnerable. When traders let CEXs keep their private keys, there’s a chance they will lose all their funds one day for reasons they entirely cannot control.
In addition to hacks, there are many other ways we risk our funds when delegating custody. Centralized exchanges can freeze accounts for sophisticated legal reasons, impose withdrawal limits and mismanage funds, leading to bankruptcy. History suggests these things often happen unexpectedly — and the only way to be prepared is to take responsibility for storing our money in our own hands.
Not just encryption
When you store crypto in a non-custodial wallet, your private keys reside on your device in an encrypted form. You have complete control over your funds, unlike centralized platforms where you have none.
Self-custody is not zero-risk. You can engage with any decentralized finance (DeFi) protocol or swap any — even unlisted — coins. This freedom comes with great responsibility: DeFi platforms have become a more frequent attack target over the last few years. Developers often focus on rapid growth, leaving security measures behind.
Today’s wallets, however, support users’ freedom, giving them more tools to protect their funds than ever before. These start with a few layers of encryption, making sure no one but you can reach your private keys. A passcode often verifies outgoing transactions and decentralized application (DApp) permissions, so there’s dual protection for daily wallet activities.
Recent: Hardware wallet Ledger helps competitor Trezor resolve security vulnerability
Some wallets even eliminate the need to remember seed phrases while keeping them decentralized. If you set up a multiparty computation wallet, private keys are spread across multiple devices. There’s no risk of single-point failure, and you can recover access to coins even if one wallet keeper is lost.
Security measures today have gone even further, making “storage-only” wallets a thing of the past. Besides private key encryption, wallets detect risks around the crypto landscape, helping users limit interactions with malicious projects. Dedicated systems detect phishing attacks, malicious addresses and fraudulent contracts, displaying risk alerts for users and helping them prevent theft.
Sometimes, users grant excessive permissions to DApps, allowing indefinite access to their funds, and then forget they did it. Some wallets provide simple tools to review previously given permissions and revoke access, especially if the system flags them as risky.
Responsible wallets also constantly undergo independent security audits by multiple parties, checking their core code and additional features such as token swap tools, NFT marketplaces, etc. Some platforms maintain a protection fund to reimburse users in case of a security incident. Finally, some also educate users on how to protect themselves from scams.
Good non-custodial wallets don’t just store funds well. They help you use them safely, making the most of your coins.
Massive amounts stored in CEXs’ wallets attract hackers like a flame lures moths. One solution is to spread assets across even more wallets so that compromising one won’t put the entire system at risk. Another one is for users to minimize reliance on centralized platforms and regain control of their funds, taking advantage of wallets’ smart security features.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
