Crypto Exchanges Failing Proof Of Keys! What is it?
Today we’re going to be exploring ‘How Cryptocurrency Exchanges Have Failed The Proof Of Keys Event.’
Before we nose dive into this, let’s quickly go over what a Proof of Keys Event is. Let’s say there is a vault in your town that can store and trade your gold coins, and everyone including yourself uses this vault. No one is allowed to enter the vault, the only thing the vault provides is a transaction summary, and everyone trusts that the vault is storing the value. However, it’s not impossible for the vaults management to be using your gold coins without your consent, or it could be outright stolen by the vaults management and employees.
So a Proof of Keys event, is essentially same as everyone in town, gathering together to withdraw all their gold coins in a single day, to prove that the vaults have the promised amount of gold coins. In our case, instead of gold coins, we are talking about cryptocurrencies or more specifically Bitcoins.
So What’s the motivation behind participating in this event?
The idea is that, if a large enough number of people withdraw their tokens from exchanges, it can reveal the exchanges that operate like fractional-reserve banks (company’s that keep a small number of depositors’ cash available for withdrawal). It’s to see which exchange is Bitcoin solvent, and which one runs like our modern-day banking system.
The public has been burnt by exchanges mismanaging funds too many times before, so they are more conscious about token ownership. An example that highlights their fears is the Mt Gox Heist. Mt Gox lost 850,000 Bitcoins, valued at $600 million at the time in 2014. This isn’t an isolated incident, there are dozens of cases of large-scale theft from exchanges all over the world.
The results from the Proof Of Keys event was pretty interesting. As the event came around, unfortunately, some cryptocurrency exchanges and third-party service providers failed. At first, it was just HitBTC, that encountered issues a few days prior to the event. According to the Proof of Keys Website Bitfinex, Poloniex, Purse.io, and Coinbase all faced certain problems before or during the POK event. Coinbase and Bitfinex however, went to Twitter to clarify their situation. Coinbase noted that the issue was related to issues at the end of December and was fixed shortly afterwards. Bitfinex was also up and running an hour after outages in the morning.
Unfortunately, HitBTC, the 14th largest cryptocurrency exchange by adjusted daily trade volumes has not yet released a public response or commented on Twitter concerning its current withdrawal problems, which shows that they may have solvency issues. HitBTC, however, told Cointelegraph in an email that the account freezes had nothing to do with the ongoing Proof of Keys Event.
But something smells fishy about this. The proof of keys event was not a surprise; this event has been planned publicly in early December, so exchanges had almost a month to prepare.
To say these problems were due to unrelated issues is an extremely convenient coincidence. However, the timing of this event is also very awkward. While the event marks the tenth anniversary of Bitcoin’s Genesis Block, in most western countries, 3rd of January is when mostly corporate staff already on their annual breaks, so it’s likely a lot of exchanges didn’t have the management team available to handle large withdrawal orders.
But at the same time, cryptocurrency exchanges have not been completely transparent about their funds in the past. According to the Blockchain Transparency Institute, many exchanges faked their volumes to allow them to effectively steal money from aspiring token projects. It turns out that this behaviour was highly lucrative with some exchanges generating hundreds of thousands of dollars.
Taking all these factors into account, it’s hard to say the proof of keys event can be conclusive about the solvency of any exchanges. However, it is a great social campaign to spread the awareness of fiscal or token sovereignty. It also highlights potential issues exchanges face and force them to take actions to prevent misconduct and improve transparency.
To those exchanges doing the right thing, the proof of keys event can be a very profitable event.
Most exchanges have a withdrawal fee, often a percentage of the assets you have stored, say around 2% or even higher. If there is a lot of people withdrawing and putting back in, it’s a lot of easy revenue for these exchanges as they will earn from withdrawal fees from their clients.
Let us know what you think about the proof of keys event.
Do you think it’s a solid way to prove the solvency of an exchange?
Or Do you think it’s a good social campaign that raises awareness of ownership and control of your digital assets?
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Disclaimer: Cryptopig content is written by a team of blockchain passionate people. We are not registered as investment advisors. Don’t take the information in this post as investment advice and make sure you do your own research before investing. Cryptocurrencies are a very risky investment, never invest more money than you can afford to lose.