The Cardano Principles For Scalability, Interoperability and Sustainability

Cardano is a unique cryptocurrency project that is based on sound principles rooted in science and engineering. Its application goes beyond financial systems, but implements a blockchain that covers a wider variety of applications. While it is available as a coin on digital exchanges, it does not yet have an actual use case (as of this posting). It is a development in progress that aims to nail the foundations for a well designed blockchain.

We can consider Cardano a Third Generation Blockchain. The First Generation uses Bitcoin’s Proof-of-Work (PoW) consensus mechanism and the UTXO model. Ethereum forms the basis for the Second Generation, which implements Turing complete Smart Contracts or EDCC (Executable Distributed Code Contracts). The Third Generation, which include other cryptocurrency like EOS and Tron, were based on Ethereum but innovate on consensus mechanisms. Like other Third Gen blockchains, it was also issued using an ICO that raised $62 Million.

Cardano, like Ethereum, uses a smart contract based system. The token or digital asset used on the network is called Ada. Ada provides balances to users with the Daedalus digital wallet. Cardano is also a platform for technological innovation and development. It will provide an operating system layer for DApp (Decentralized Applications) that run on the Cardano network. These DApp provide an interface to smart contracts that execute code to transfer value (e.g. payments, transfers, change of ownership, etc.). Cardano will facilitate these transactions and record it on its own blockchain for immutability and transparency purposes.

Cardano has 3 main features in its blockchain.

Scalability – The network must be able to scale to meet the demands for high volume transaction processing. The developers address the issue of scaling by adopting a different consensus protocol mechanism that is based on Proof-of-Stake (PoS). Scalable systems are faster and more efficient, which is what a blockchain needs in order to handle production level processing of transactions. The network architecture for Cardano proposes using RINA (Recursive Internetwork Architecture).
Interoperability – Many blockchains cannot directly interoperate with one another. There are solutions now that allow for “atomic swaps”, which essentially provides a way for two blockchains to transfer value between each other. Prior to that, digital exchanges were the only way to go. That creates an intermediary which is something a blockchain using direct P2P transfers can remove. With a third party, the cost of transactions increases and it can be tampered, censored or rejected.
Sustainability – Many critics have called Bitcoin inefficient and unsustainable in the long run due to the way it consumes resources. A sustainable system is always more ideal in terms of efficiency and reliability. Sustainable systems have a way to last thus ensuring some degree of surviving into the future. Many blockchain projects lack this feature and have to end for a variety of reasons.

PHILOSOPHY

The following are Cardano’s philosophical principles taken from their website.

Separation of accounting and computation into different layers
Implementation of core components in highly modular functional code
Small groups of academics and developers competing with peer-reviewed research
Heavy use of interdisciplinary teams including early use of InfoSec experts
Fast iteration between white papers, implementation and new research required to correct issues discovered during review
Building in the ability to upgrade post-deployed systems without destroying the network
Development of a decentralized funding mechanism for future work
A long-term view on improving the design of cryptocurrencies so they can work on mobile devices with a reasonable and secure user experience
Bringing stakeholders closer to the operations and maintenance of their cryptocurrency
Acknowledging the need to account for multiple assets in the same ledger
Abstracting transactions to include optional metadata in order to better conform to the needs of legacy systems
Learning from the nearly 1,000 altcoins by embracing features that make sense
Adopt a standards-driven process inspired by the Internet Engineering Task Force using a dedicated foundation to lock down the final protocol design
Explore the social elements of commerce
Find a healthy middle ground for regulators to interact with commerce without compromising some core principles inherited from Bitcoin

OUROBOROS

Cardano’s consensus algorithm uses PoS and is called Ouroboros. This determines how participating computers called nodes come to a consensus on the network. Instead of miners like in PoW consensus algorithms (used by Bitcoin), PoS requires staking funds to qualify or participate as a validator node. These “stakeholders” must contribute to secure and process blocks of transactions on the network and in return they will be incentivized in Ada. If a “stakeholder” is dishonest or attempts to attack the network, they can lose the funds they staked so there is a consequence. This aims to make “stakeholders” good faith actors rather than become bad actors. Once “stakeholders” validate a block it is added to the main network’s blockchain.

What makes Cardano different from other PoS-based networks is according to their own website:

“For a blockchain to be secure, the means of selecting a stakeholder to make a block must be truly random. An innovation of Ouroboros to produce the randomness for the leader election process is to do this by way of a secure, multiparty implementation of a coin-flipping protocol.”

DEVELOPMENT COMMUNITY

Cardano also fosters a development community since it is an open source project. There are no barriers to entry for those who want to contribute, but is mostly on a voluntary basis. Developers are rewarded in Ada for their efforts. Cardano’s code is available for others to use in order to develop applications for the platform.

At the moment, Cardano is being managed by the IOHK (Input Output Hong Kong). They will be a part of the project until 2020 according to their contract.

FUNCTIONAL PROGRAMMING

The main programming language used in Cardano is Haskell which is functional, strong and static typed. One of the reasons it was used is due to its reliability in mission critical systems. They provide a solid and secure foundation for back end systems that handle massive workloads. This means the code and logic is stable enough to be able to scale and provide reliability with little room for failures.

In functional programming if there is a function f(x) that we want to use to calculate a function g(x) to get the results of yet another function h(x). Rather than solving in sequence, it can be simplified to a single function:

h(g(f(x)))

This provides a mathematically simpler way of computing. These form the foundations for Cardano Smart Contracts. It aids in Formal Verification to prove how a program acts and what its results will be. This gives Cardano a “High Assurance Code” property.

THE PROJECT ROAD MAP

Cardano follows a road map for its development. It is divided into 5 phases called eras: Byron, Shelley, Goguen, Basho and Voltaire. It is now in the Voltaire era in 2020, which will decide the digital governance used on the network.

For more on the road map, click here.

THOUGHTS

Like any cryptocurrency project, I don’t suggest buying their token just because the project looks good on paper. This is how Cardano is like. While it is based on a sound foundation, it has not yet been applied to solving real world problems. It offers a theoretical solution that is yet to be proven. If it does deliver on its goals, Cardano’s prices may not really go up either, since it depends on the asset’s liquidity and volume. The project looks promising and that can spur certain expectations.

Note: This is not financial advice. DYOR always to verify facts.

The Different Types Of Cryptocurrency Assets

Not all cryptocurrency are the same. They have different purposes, from utility tokens that provide a service to tokens that transfer value. Tokenizing a certain industry (e.g. cannabis, music, entertainment) is also possible using digital transformations with the use of a cryptocurrency with a blockchain or distributed ledger. Although they were based on the foundations of decentralization, some are more decentralized than others. It is because of the problems of scalability. In order to become more scalable, many assets have become more centralized in order to handle more transaction volumes.

Platform Cryptographic Assets

Ethereum, NEO and EOS are examples of application development platforms. Developers can use these platforms like an operating system to build applications called DApps (Distributed Applications). They are based on the concept of gas as unit of cost for computation. The logic is encapsulated in smart contracts, which contain conditions for executing code that can perform transactions. Gas costs, measured in units called gwei, are smaller denominations of the main token like ether that are spent on processing the transaction (much like a transaction fee). Many proponents do not classify these assets as securities, but a platform token needed for operations on the network.

Payment Cryptographic Assets

Bitcoin is the classic example of a P2P digital currency or payment cryptographic asset. This asset class is used as a medium of exchange for payments on goods and services. The use of these asset tokens provide a fast and efficient way to transfer value for cross-border payments and direct payment transfers without requiring a third party like banks. This circumvents jurisdiction regulations, so there are plenty of legal implications regarding these assets. There are many of them based on the original Bitcoin architecture. Although Bitcoin’s token BTC was meant for payments, it is fast becoming a store of value.

Side Chains

These complement the main network of a blockchain. This enables BTC and other payment assets and other ledger assets to be transferred between multiple blockchains. These implement an off-chain solution and are primarily used for the purpose of scaling the network. It removes the burdens of transaction processing from the main network. However, settlements are still made on the main network to record the state of the transaction. Side chains merely facilitate the transfer of value while the main network records it. The Lightning Network is an example of this.

Application Token

There are many ways cryptocurrency can be applied to real world business and financial solutions. It has also found its way to certain industries with interesting applications. Stablecoins are an example with the Tether project. This allows pegging fiat to a cryptocurrency asset for the purpose of trading in a volatile market. These allows traders to store the value of their fiat currency without losing from the speculative cryptocurrency market. Golem and Veritaseum are other examples of how tokens can be used for computing distribution and capital market connections. It is related to protocols, because applications run mostly on top of a protocol built for a platform.

Protocol Token

Protocols refers to rules of a particular ecosystem. It can be in the finance or energy market. These tokens were designed with incentivization as a purpose. This allows more value to enter blockchain based cryptocurrency. Protocols provide a supporting layer for applications built to run on platforms. They are mutually beneficial to each other. For example the Ethereum protocol can be used to support smart contract development running DApps. In order to run the DApp it will use a protocol token like ether. The DApp itself can generate its own value using an application token as an incentive.

Facebook Libra Is Realizing The Difficulty Of Regulatory Compliance

Facebook’s Libra is not looking good. Paypal, Mastercard, Visa and even E-Bay have pulled out of the Libra Association. This comes after the hurdles Facebook needs to overcome in order to meet regulatory compliance. This tells us just how difficult it is to build blockchain-based solutions that offer cryptocurrency as payments. It seems easy on paper to draft a proposal to gather some of the world’s leading companies to form a system for digital and cryptographically secure payments.

The following have been some of the criticisms thrown at Facebook from members of the US Senate (Senators Sherrod Schatz and Brian Brown) in a letter sent to CEOs of Visa, Mastercard and Stripe.

“We are concerned because key questions remain unanswered about the risks the project poses to consumers, regulated financial institutions, and the global financial system. We urge you to carefully consider how your companies will manage these risks before proceeding.”

The senators continue with this warning:

“Facebook is currently struggling to tackle massive issues, such as privacy violations, disinformation, election interference, discrimination, and fraud, and it has not demonstrated an ability to bring those failures under control. You should be concerned that any weaknesses in Facebook’s risk management systems will become weaknesses in your systems that you may not be able to effectively mitigate.

All this seems to have influenced the decisions of Libra Association members from dropping out of the project. Facebook is not exactly trustworthy when it comes to data privacy and security after revelations of their involvement with Cambridge Analytica and selling user data to third party without full consent. This makes the situation even more difficult with so much opposition from within the US government.

Libra aims to serve the unbanked and provide a fast and reliable way to make electronic payments using Facebook’s ecosystem. This is actually a major undertaking because of its potential to open up the cryptocurrency market to mass adoption. What is at stake here are Facebook’s 2+ billion users along with its social media platform Instagram and messaging application WhatsApp. Those who joined the Libra Association were viewing this as a major business opportunity to tap the market which this creates with Facebook’s users. Users would use the Libra token which they can access from the Calibra digital wallet to make payments, using WhatsApp.

The opposition seems to stem from the impact this would have not just on the US economic and financial system, but the world as well. This is because other countries also do not have a favorable look on Libra. In essence, Facebook would become a bank that would not be regulated by jurisdiction like the US SEC if it were allowed to operate. That can also threaten major banks around the world who could lose their customers to Facebook. With the ease of payments and money transfers, Facebook could definitely facilitate the unbanked all over the world. All they will need is their smartphone or computer to open Facebook and they have access to their digital money.

That would be unfair to other financial institutions, who are regulated and follow jurisdiction compliance. Why should Libra have no regulation when it is doing the same type of business as banks and financial service companies. What Facebook probably didn’t realize is the reason cryptocurrency are better off decentralized without any central authority. Bitcoin has been around for more than 10 years now because it has no owner or actual structural organization. It is truly decentralized in its governance. Despite being associated with Satoshi Nakamoto, no one can come after him because he remains anonymous. Perhaps Facebook is too late in realizing this is how you build a cryptocurrency.

The cryptocurrency community is also not that favorable of Libra, though some are open minded to the idea. Those who look in favor like the idea because it could open up the cryptosphere to more people. Libra would be the on-ramp to other cryptocurrency so it is a gateway so to speak. The more die hard cryptocurrency supporters don’t even consider Libra as a true cryptocurrency running on a real blockchain. It is basically just another form of electronic cash pegged to fiat that uses a digital ledger technology (DLT) that is highly centralized. The purpose of a true blockchain with a cryptocurrency is to be a trustless and permissionless decentralized system.

The odds seem stacked up against Facebook and their Libra Association. The good thing about this is that Facebook is realizing the potential of cryptocurrency and blockchain technology. They must meet regulatory compliance in order to proceed. The Libra Association is still intact, but they will need Facebook to meet compliance in order to get approval. The stakes are high, and there is big money to be made behind this. What is clear here is that the US SEC is making it clear that in order to play you have to follow the rules. It is now up to Facebook if they can meet those requirements.

Stablecoins – Stability In A Sea Of Volatility

The cryptocurrency market is highly volatile. That is the main risk involved due to the speculative nature for cryptocurrency. Price changes can suddenly shift in a matter of seconds. A typical phenomenon observed in the market is called “pump and dump”, and involves a large injection of capital followed by a large outflow of it as well. This is an example of market manipulation, often carried out by investors called “whales”, who have large funds that can influence the market.

Since there is little regulation and lack of clarity in this space, it is really hard to control how money moves in and out of the market. Price valuation depends on the market cap that is the total capital of the cryptocurrency asset. The idea here for most investors is a future return of value, which is typical of a security. However, cryptocurrency are meant to be a form of payment or medium of exchange which has utility. It is supposed to be a currency like the US Dollar or the Euro, but speculators are treating it as a valuable asset. In other words, most cryptocurrency especially Bitcoin, are being treated as a store of value. Investors are “HODling” or holding on to them with the expectation of higher values in the future.

The problem with holding is the price volatility of cryptocurrency assets. The market shifts and swings, with 100% gains getting wiped out in seconds. Those who continue to hold are using a long term strategy but traders who go short will often lose more money than they expect. There is actually a solution to avoid the price volatility in the market for traders. Enter stablecoins, a cryptocurrency that is pegged to the value of fiat currency.

The best and oldest example of a stablecoin is Tether. The token is named USDT and is pegged to fiat currency like the US Dollar, Euro and Japanese Yen. This provides price stability for traders who want to keep their funds in the cryptocurrency market without the volatility of price swings. It makes sense to keep USDT as a trading pair with the top cryptocurrency in the market. Traders who hold USDT, don’t have to undergo any conversion at exchanges from fiat to cryptocurrency any longer. This will cost traders more money because of the associated fees with exchanging between fiat and cryptocurrency. With USDT, traders can conveniently hold their cryptocurrency assets without being affected by price swings since the USDT token is always pegged one to one to the US Dollar, etc. Since USDT has existing trading pairs with many cryptocurrency it is much simpler to trade on digital exchanges.

The complexity of moving large amounts of money from a bank to a digital exchange and vice versa, is in itself a hassle. Not to mention the scrutiny and the fees involved. Traders who have to convert fiat from their bank back to cryptocurrency to trade on exchanges are also incurring a loss because they could miss the moment to trade because of the process involved. A trader will be able to trade faster by just holding a stablecoin like USDT which they can convert and pump back into the market with an order book on digital exchanges.

According to Wikipedia, a stablecoin is:

“… designed to minimize the volatility of the price of the stablecoin, relative to some “stable” asset or basket of assets.”

The basket of assets can include precious metals or even other types of cryptocurrency. In the case of Tether, 1 US Dollar is supposed to back each USDT token issued. Maintaining that price point requires auditable proofs, which stablecoins must be able to provide to regulators.

Stablecoins even have a practical business application not just for traders, but for businessmen and financiers. Moving money across borders with cryptocurrency is actually faster and much simpler than using a bank of money transfer service. It does however, circumvent jurisdiction laws and that is the issue with transactions like this. There have also been criticisms that stablecoins may not actually have the fiat reserves to back their cryptocurrency. This has been the controversy with Tether. It is more a lack of transparency in their financial information that has regulators investigating.

Another issue that seems to beg scrutiny are how centralized stablecoins are under their respective companies. Most all stablecoins – Tether, Paxos, Gemini, TrueUSD – were developed by a company. Though they use a blockchain-based digital ledger technology, their governance and business process is not truly decentralized. They still make money from fees, but what if the government or a certain jurisdiction shuts down the company for non-compliance to regulations? What happens to the stablecoin holders? Digital exchanges can choose to blacklist the stablecoin token, and this would be disastrous for holders who have plenty of them to exchange. Stablecoins may also lead to an increase in the supply of money leading to inflation that is pegged to a national currency. That is another possible problem that stablecoins could introduce or exacerbate.

There are hurdles and many regulatory clarity questions regarding stablecoins. They can eventually lead to greater adoption with further cooperation with jurisdictions and regulators. Even Facebook and Walmart are planning to release their own cryptocurrency that uses a stablecoin. This can impact the mainstream since those are two of the world’s biggest companies. The potential is there, so it is just a matter of how they will be regulated and how companies who issue them will be able to comply. Stablecoins are beneficial to the cryptocurrency market as a whole. Whenever USDT trading volumes are high, it usually correlates to more trading activity of cryptocurrency assets like Bitcoin. Digital exchanges like Huobi and Binance reported 40-80% of transactions use USDT. It is also originating from China, where traders are using stablecoins like USDT to avoid banking restrictions (From article “Why Tether Volume Is At All-Time High” on Coindesk).

A Cointelegraph article “Stablecoins to Play Key Role in Crypto Adoption, Says New Report” states that stablecoins will have a key role in cryptocurrency adoption. This is optimistic news for stablecoins as they aim to address market volatility in cryptocurrency and hyperinflation with fiat currency. Countries with a high inflation rate can adopt stablecoins to stabilize their funds as a sort of safe haven, though this has not yet been seen on a proven scale. There are plenty of new projects being mentioned now that have the use for stablecoins. It could possibly draw the attention of institutional investors. The stability it can bring to a volatile market is what makes it an attractive solution for trading and perhaps even investing.

Blockchain Interoperability – Cross-Chain Compatibility Among Dissimilar Blockchains

It seems inevitable that there will be many different tokens running on dissimilar systems. Unfortunately, these tokens will have their own blockchains. The good news is that they all run over the same IP based network. This allows a protocol layer to provide interoperability services to bridge various blockchains. This means a direct exchange of value from one cryptocurrency to another. As a result, atomic swaps will become possible across borders and payments can be instantaneous among tokens.

There are many different types of blockchains today and they are very much silos of their own ecosystem. There is no universal way to interoperate other than thru digital exchanges. The currency is often paired with a stablecoin to try and peg the value as close to fiat or with major cryptocurrency like BTC. The problem is that some pairings just don’t exist. The inconvenience here is the user will have to exchange their token to a supported pairing on their exchange first in order to make it useful. For example suppose there is no direct conversion between MyCoin and ANewCoin. Most of you know the drill. You have to buy into an exchange with fiat a supported cryptocurrency, and in most cases it will be BTC or ETH. It is only after you have bought that can you convert to MyCoin to get ANewCoin. Imagine all that happening with just a few finger swipes on screen or mouse clicks and all behind the scenes.

There are projects like Wanchain and Cosmos that focus on blockchain interoperability. They have an Application Layer (DApps, website, smart contract, etc.) that can interact with their software at the Interoperability Layer. This provides an API into the Blockchain Layer itself ubiquitously without the users doing anything else. It is simplified for a more pleasant user experience. Making it more user friendly leads to greater adoption of technology due to ease of use.

A good way to envision this is let’s say you are an ETH holder. You are interested in buying a luxury watch directly from a seller that is valued in BTC. Instead of exchanging ETH for BTC at a digital exchange and then pay for the item, interoperability will allow you to pay directly using an app with ETH at BTC valuation. The conversion process takes place automatically thru the interoperability layer, quickly transferring value from the ETH blockchain to the BTC blockchain. The seller gets paid and the item is delivered to the buyer. Certain programming interfaces can also create smart contracts for these type of transactions to release the item for delivery upon receipt of payment.

All that is required is software that can understand the different protocols. While it would appear to be a centralized settlement layer, it is actually not. It remains decentralized because the processing is done by not one organization, but different trustless nodes that run the software. These nodes are computers that belong to people who don’t know each other. All they have in common is that they are running the same software over the same network. Transactions are then processed by these nodes and incentivized for it.

Critics might quickly say that these systems are not scalable because blockchains are slow and cumbersome databases. You can argue that, but it still provides cryptographic security which is very important in value based transactions. There are new ways to settle payments that provide both on-chain and off-chain solutions to address scaling issues. An example of this are Bitcoin’s Lighting Network and Ethereum’s Raiden Network. By moving micro transactions like instant payments off-chain, the idea is to scale to larger volumes since the payments can be handled without going through a tedious consensus process like Proof-of-Work. Interoperability will have support for these types of systems as well.

Interoperability among the major public blockchains, will allow seamless, reliable and more efficient transactions for users. It is similar to how we communicate today. English provides a bridge among many countries because it is widely spoken and understood. The English language would be like the protocol for communications used on blockchains for interoperability. This is the ideal vision of a digital economy where transfer of value is frictionless and not complicated, regardless of cryptocurrency.

Bitcoin Pizza Day – May 22

May 22, 2010 was the day software developer Laszlo Hanyecz agreed to pay 10,000 Bitcoins for two delivered Papa John’s pizzas.

Call that a waste of money, now that BTC is worth over $8,000?

Not really. Instead buy this man a drink for being the first person to use BTC as a payment. Even though it was pizza worth around $41.00 at that time, it is considered the first truly successful use of BTC. It is a medium of exchange and electronic payment system after all. This proved the use case for it. Now today it is much different of course, because BTC has become many times more valuable with a larger market cap.

Laszlo was no idiot who wasted away his BTC. He is actually one of the original volunteer developers who helped in the early days of Bitcoin. He got rewarded with BTC, and he probably should still have some around. 10,000 BTC today will probably set you for life. In the significance of the moment, what Laszlo did was actually quite bold. He used BTC in a real world situation, even if it was just to buy pizza.

Since then, BTC has had a bad rap from mainstream finance people e.g. Jamie Dimon, Warren Buffet. They associate it as “rat poison” with no instrinsic value used by criminals for illegal transactions i.e. The Silkroad. Then again this argument falls apart when you point out that cash is the most used currency for illegal transactions, which cannot be easily traced while BTC can be traced on the blockchain (transparency). The drug deal on the corner is most likely done with the use of cash rather than BTC. Perhaps Jamie Dimon has come around because he sees the potential for the blockchain rather than Bitcoin itself. Mr. Buffet though, has not, but we are talking about a successful investor in the tradtional finance economy. Today it is a different story with how our economy is transforming digitally.

Today BTC is used more as a store of value, like gold. It can also be used to transfer value across borders, pay for retail items e.g. Overstock accepts BTC and lock into a deposit as a digital asset for loans or future payments. There are new non-mainstream financial instruments that allow holders to use their BTC to make investments into funding projects, donations and even pension funds. More new services will surely come as financial giants enter the cryptocurrency space.

Pizza is great comfort food. When you know you can buy it with cryptocurrency, it just gives a better feeling of what is to come as it evolves. For now if you have 10,000 BTC, HODL it. With that much BTC, you can buy pizza anytime for the rest of your life.

Note: This opinion piece are thoughts about Bitcoin and is not meant to be financial advice. Do your own research always.

The Bitcoin Binance Hack And The Lessons Learned

At the time of this writing it is the start of blockchain week In New York City. One of the hot topics that will be discussed has to do with the most recent Binance hack that led to $40.7 Million of stolen Bitcoin (worth 7,000 BTC at the time of the incident). This is actually not the first time Binance has been hacked, they have a track record. Despite their concern for cybersecurity, it seems their system is not really that secure. This is not to say that Binance does not take cybersecurity seriously, because they do. They implement a 2FA type of authentication which requires using either an authenticator that generates a random code or the code is sent via an SMS text message to a smartphone. It is pretty secure after the fact, yet it was foiled time and time again. At this point the best that Binance can do is to track the stolen BTC and get the cooperation of other digital exchanges to freeze the funds. We actually know which address moved the coins (The transaction was traced from this link).

Fortunately, Binance has what it calls a SAFU (Secure Asset Fund for Users) which is a way of providing an insurance to users on the exchange in case of emergency. Changpeng Zhao or CZ, Binance CEO, has guaranteed that those who lost Bitcoin from the hack will be compensated for their losses. That is good to know, but will this be the end of these type of hacks? It has already happened before, so there is likelihood that it can happen again. That is unless Binance will add new security measures that tighten their systems even more. Then that gives hackers a new problem to deal with.

Now here is what is concerning. In an official statement made by Binance regarding the hack:

“The transaction is structured in a way that passed our existing security checks. It was unfortunate that we were not able to block this withdrawal before it was executed. Once executed, the withdrawal triggered various alarms in our system. We stopped all withdrawals immediately after that.“

The fact that it “passed our existing security checks” is a cause for concern that is what they are working to improve. According to this Coindesk article, Binance is going to do a revamp of their security system. They will certainly look into improving their API for 2FA as well as their withdrawal validation process. If a hacker can easily hack a user’s API key or 2FA credentials, you don’t really have a secure system. It was probably not an easy feat for the hackers, so now Binance should make it even more difficult to decrease the likelihood of any successful breach.

Phishing attacks are one of the exploits hackers use to get information from users. Once they trick a user to giving them that information, the hackers then use it to access the exchange. That is really all you need to do to get past Binance’s security check. Binance implements withdrawal limits for unverified users but for those who are verified, the hacker can wipe out their entire balance on the exchange.

Other ways a Binance user account was compromised can be from spyware, keyloggers or remote viewing software like VNC. Having an antivirus and cyberbsecurity software installed on a computer can help detect these malware. Another way to foil these attacks is to not keep funds stored on an exchange. Using a cold storage (not connected to the Internet) on a hardware wallet provides more security. In fact, some smartphones like the HTC Exodus and Samsung Galaxy S10 provide hardware wallet support for cryptocurrency now. For the strictest security, keep your digital assets safe in cold storage and not on hot wallets or custodial services like digital exchanges.

According to CZ:

“We are working with a dozen or so industry-leading security expert teams to help improve our security as well as track down the hackers.”

That’s right. Binance is definitely going to need more help in cybersecurity to fix this problem. Remember, it is not the blockchain that got hacked, it is Binance’s system. Binance also announced support for hardware devices with 2FA, a more secure way to connect to Binance. A system like that would require hackers to have possession of the actual hardware device. Think of this as a sort of physical key, that only gives access to the user who owns it.

The risk of a more digital world is computer hacking. Binance has been successfully hacked in the past. A user lost 2 BTC when a hacker used the credentials from their hacked e-mail address. Another hack occurred in July 2018, which was a “potential” hack that led to the theft of $45 Million of Syscoin and dumping of BTC. It was not Binance’s direct fault, but more on the Syscoin wallet. Regardless, it was a system anomaly that Binance admins detected. Binance immediately shutdown and then reset their API keys. That’s exactly what they did with the most recent hack. It seems that the answer to the problem is just shutting down and resetting everything. However, that does not solve the problem apparently.

Due to this large loss of BTC, someone from the BTC development community reached out to CZ. A suggestion was made to reorg the BTC blockchain and give back the stolen funds to their respective owners. Now the reaction to this was not good at all and thankfully, CZ decided not to do this. That would require Binance to use a “51% attack” to gain majority hashing power on the Bitcoin network to overturn transactions. The problem with this is an ethics issue because it would require Binance to get a consensus among miners and nodes on the network to support this plan. It goes against the main ideology of the blockchain, which is about decentralization and immutability. When you get a collusion of miners to provide Binance with majority hashing power, it centralizes the network to benefit one organization. This may also lead to inconsistencies on the blockchain if several bad actors try to mine on their own chain to gain control of the network. The idea that a consortium of miners with hashing power can overturn a trnsaction goes against immutability on the blockchain. It would be a terrible idea to do this.

The result of a reorg may lead to more factions in the Bitcoin community. There might even be a fork and this is not going to be good for the price of BTC as a store of value. It may even ruin the market leading to turmoil and massive sell offs as users collect their money. There needs to be a clear direction for BTC and a reorg is probably not in everyone’s best interest since it really only benefits Binance and the hacked accounts. This is not a consensus of the network’s interests.

The good thing is that the hack did not affect BTC prices. FUD didn’t lead to any massive dump or sell off, proving that there is confidence in the market. Taking care of the real problem, which is cybersecurity, is what needs to addressed. Binance vows to increase their security which is the most important feature right now for any digital exchange. Users need their funds to be safe from hackers, so this is going to be the responsibility of digital exchanges.