Chainalysis on the subject of centralized exchanges

Holders prefer to rely on centralized exchanges (CEX) as the platforms hold more flexibility in high-tech, according to a report by Chainalysis.

Indeed, cryptocurrency investors are increasingly less comfortable holding digital tokens on exchanges amid a growing threat of hacks in the decentralized finance (DeFi) space. 

This is the recent finding of Road Town, the cutting-edge digital token exchange platform. The theory has also been confirmed as mentioned by Chainalysis, the well-known blockchain data platform. 

Chainalysis: the centralized and decentralized nature of exchanges

The past year has seen a flurry of security breaches and code exploits on DeFi protocols. 

This is because of the decentralized nature of DeFi platforms, as they provide hackers with open access to code that could reveal vulnerabilities. 

In contrast, this is different from the nature of centralized exchanges, which have invested in heavy defenses designed to protect users’ digital token holdings.

Indeed, most centralized platforms comply with increasingly stringent secure operating system standards and verified third-party security system controls. 

Several security systems have been put in place: two-factor authentication (2FA); distributed denial-of-service (DDoS) protection; and regular system testing to protect against potential vulnerabilities. 

In addition, firewalls and intrusion detection systems are now part of the arsenals to protect against possible future threats. 

Data from CEXs

After the prevention and security measures put in place by centralized exchanges, the number of thefts and total value stolen dropped by about 58% from $972 million from the peak in 2018 to $413 million last year. 

So far in 2022, “only” $80 million has been stolen from centralized exchanges. 

Insignificant numbers when compared with DeFi accounting for 96% of theft losses, standing at $2.2 billion in 2022. 

According to Chainalysis, end-of-year Bitcoin balances for centralized exchanges remain near all-time highs in 2022, despite prevailing market conditions. 

This factor suggests that users are increasingly comfortable holding their assets on centralized platforms.

Bitcoin balances since the beginning of the year for centralized exchanges stand at 6.9 million, up 11% from 6.2 million at the end of 2019.

Chainalysis battling hackers 

Paolo Ardoino, CTO of Bitfinex, said: 

“The Chainalysis findings point to the increasing resilience of centralised exchanges against hackers.

While we always advise cryptocurrency users to take security into their own hands by taking steps such as holding tokens in cold storage or using a hard wallet device, the custody solutions deployed by centralised exchanges have advanced considerably in recent years.”

Also confirming this is Kim Grauer, director of research at Chainalysis, arguing that although centralized exchanges were initially the main target of hackers, so much has been invested in the security of the services that, to date, it is very difficult to challenge these businesses. 

Centralized exchanges do not collapse in the market turmoil 

Despite market turmoil, Chainalysis has seen continued use of centralized exchanges. 

The blockchain analytics firm noted that on several days in June, more than 1 million unique wallets sent funds to exchanges, swinging north of 800,000 most recently.

Grauer is then keen to point out:

“HODLers are holding, and if anything, we saw an increase in the accumulation of crypto by longer term holders. Much of this crypto is being held on centralised exchanges.”

In fact, holders’ confidence in centralized exchanges has been bolstered by the performance of the platforms during extreme market conditions. 

It can be seen that centralized exchanges have generally remained stable despite the liquidity crises experienced by some of the major platforms. In particular, Bitfinex offers customers an institutional-grade low-latency platform. 

For example, the platform offers execution speeds of up to four milliseconds for its institutional clients, who can connect to exchanges through proximity hosting services. 

Although such services are designed for major market makers trading on the platform, other clients also benefit from access to a high-performance platform because orders can be filled regardless of market conditions.