Are your Crypto safe in Exchanges?

Hello my dear crypto enthusiasts! Just how safe are some of the crypto exchanges that so many of us rely on? Could some be ticking time bombs waiting to go off and which are safe and sound ever since the implosion of FTX. These questions have been on everyone's mind, throwing a seemingly Never ending stream of online FUD and it's no surprise that many people in crypto have deep misgivings about exchanges in general. So in today's blog, I take a look at four of the biggest and best known exchanges out there and examine how safe they really are!

Before I start talking about these exchanges, it is important for me to state that no matter how secure you think an exchange is you can never be 100% certain that your funds are safe. As long as you have to rely on a third party to hold your crypto there has to be a level of of trust. The only way that you can get that certainty without relying on trust is through self- custody.

Before going to the exchanges, we need to have some proof of solvency. ne of the well-known ways for these exchanges to prove their solvency is the proof of reserves (PoR). But what is it? It's a method of cryptographically verifying that an exchange is actually backing the coins or tokens that it claims to hold on behalf of its users. PoR is a process whereby the exchange is able to in a trustless manner show that they are backing their liabilities one to one with user assets. Now this is important because if an exchange does not have all client funds backed with assets then it's running on fractional reserves that's what happened with FTX, Quadriga and Mt. Gox. While PoR is a relatively effective way to try and prove solvency it does have a number of shortcomings. Firstly, these are not audits in the traditional sense that means they're not an account of the financial position of an exchange and cannot verify certain other important factors. These factors include that the exchange controls the keys, they are practicing good risk management with the keys, they have strong controls against hacks and few others.

With that said, let's move on to discuss some of the biggest crypto exchanges. Keep in mind that I will be using the CoinMarketCap ranking to list out the top 4 current best exchanges.

Coinbase

When it comes to coinbase I don't think you need too much background that's because most of us are pretty familiar with the exchange. And probably already have an account there. Now coinbase is the only crypto exchange that's listed on a global stock index. This is important because in order to get that listing it would have needed completely open and transparent books. Coinbase's accounts are fully audited by Deloitte a member of the big four of accounting firms. What this means is that coinbase doesn't publish or run proof of reserves because there is the underlying assumption that fully audited accounts should suffice as security.

But having said that you still can't independently as a user verify that your funds are included in a liability snapshot. You'll need to trust the veracity of a Deloitte audit. Apart from that coinbase is one of the safest exchanges out there as it hasn't suffered any sort of external hack. The only ones that tend to happen are when a hacker is able to fish their way into a users's account. Although Coinbase claims to have criminal insurance for digital assets, this coverage is only partial, therefore in the unlikely event that Coinbase's digital assets were taken entirely, there would be a gap in coverage. However, there should be very little chance that a hacker could access Coinbase's whole hot and cold storage system. Therefore, Coinbase is among the safest exchanges available, all things considered.

OKX

This is one of the fastest growing International exchanges. For those unfamiliar with OKX, it used to be called OKEx back in the day. The rebrand came in January 2022 and is part of the company's goal of expanding beyond just a centralized exchange. OKX was one of the first exchanges to start publishing proof of reserves. It was also the first to start using zk-STARK technology for liability. Through the use of these zk proofs users are able to check that their balances have been included in the most recent snapshot. Meanwhile on the asset side of the equation these are onchain and so can be independently observed and monitored. All of OKX's exchange addresses are publicly available, and you may view the real-time balances of these accounts. After FTX, it has been extremely difficult to find an auditor ready to work with any cryptocurrency exchange. As a result, OKX has been having difficulty finding an auditor, although they are still open to working with any farm that will engage.

When it comes to other forms of asset security OKX has also never been hacked. This could be on account of the rigorous cold storage and hot wallet protocols. In fact a few months ago the exchange was able to secure a SOC 2 type II certification. This is an industry standard certification which is able to demonstrate that the company's processes for governing its services managing sensitive data and protecting data privacy meet the highest global standards. So OKX appears to be a safe exchange with adequate reserves.

Bybit

This exchange has been around since 2018 and is perhaps better known for its futures trading platform. However Bybit started diversifying into spot trading nfts and numerous other instruments about 2 years ago the result has been an explosion of volume. Now, we are interested in Bybit's security and the safety of its users funds. Bybit started conducting proof of Reserve audits in December 2022.

When it comes to comprehensive third-party audits Bybit unfortunately faces the same challenges as OKX does. In this regard that is it's not from a lack of will or motivation to use external auditors but rather that the auditors themselves don't want to work with crypto exchanges. In this case the proof of reserves and liabilities should suffice from the perspective of solvency. Moving on to broader security Bybit has also never been hacked. In addition to all the exchange level security deployed to protect user assets Bybit also has a number of tools that customers can make use of to prevent unauthorized account access.

Binance

Binance is perhaps the one that's been under the most scrutiny recently. Now the reason why binance has been under so much scrutiny is of course because of all the legal challenges that it's been facing. Binance has been sued by the CFTC and the SEC in separate lawsuits. On top of that Binance has also been facing battles with regulators in other countries far and wide. But the most important concern that traders and users will have is solvency. No amount of regulatory action will change the fact that if liabilities are fully backed everyone will be able to withdraw their funds even in the event of a crisis. Now Binance has also published regular proof of reserves it started its first back in November 2022 and has published monthly on since then.

Looking at the liability side of the equation binance has also transitioned from Merkle Tree proofs to zk-SNARK technology. This allows users to not only make sure that their accounts were included in the snapshot but also to confirm that all balances that have been disclosed are correctly accounted for in the snapshot. So based on these PoR checks it appears as if Binance has all liabilities backed one for one with assets.

Unfortunately Binance also has no third-party independent auditor. In terms of other security Binance was the victim of a hack back in 2019 for about $40 million, but user funds were fully covered by the exchange and it even led to the establishment of a dedicated fund called SAFU. It is clear that Binance has gone out of its way to prove solvency and as long as you are personally comfortable with PoR audits even the most severe FUD shouldn't give you sleepless nights.

I want to again say that there is nothing comes closer when it comes to safety than self custody. You should always keep any funds held on exchanges to a minimum because as long as you don't control your keys you don't control your crypto.

All the images used in this blog are my original work and belongs to me unless and otherwise separately mentioned

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