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Binance hack incident highlights dangers of decentralization

 


Crypto  exchange Binance  's native chain was suspended Thursday after a security breach led to the exposure of millions of dollars worth of cryptocurrencies.


The incident obviously sent shockwaves through the crypto world, but for me it also highlighted the dangers of decentralization.


Do not get me wrong. Decentralization is arguably the biggest pillar of everything cryptocurrency is built on. It's a concept that has a real chance of turning everything we know about finance, money, and the economy in general on its head. It can make the world a better place.


But the Binance incident shows that at this early stage of cryptocurrency — let's not forget that Satoshi Nakamoto only wrote his Bitcoin white paper in 2008 — decentralization also poses some very real risks.


What happened to Binance and what does decentralization have to do with it?

Late Thursday evening, an attacker targeted Binance Chain. Initial movements on the chain indicate that 2 million BSC tokens were targeted by the attacker.


BNB Chain estimates that over $100m in assets were moved but confirmed that $7m in assets were frozen almost immediately, reducing overall losses.


The decision to shut down the entire chain is an amazing move by Binance. As I said, blockchains are designed to be decentralized. This episode shows that BNB is just the opposite.


Obviously, this raises all sorts of problems. The crypto purists are furious that this is actually a company running the entire ecosystem - the very same as Web 2.0 and what crypto is supposedly trying to fight.


You're right. On the other hand, Binance’s ability to freeze $7M demonstrates that centralization, while going against crypto mantra, also has its benefits. $7 million may pale in comparison to the overall scope of the breach, but it's still a heck of a lot of money. And we're just getting started - by the time you're reading this, more may have been confiscated.

Will Binance's reputation be damaged?

Binance has such a strong position in the market and is run by a very popular CEO that I believe this incident is being largely swept under the rug.


Binance has even been hacked before. It's also technically a magical $100M BNB production out of thin air rather than a direct attack on consumers, which is an important difference (although this is bad news for all BNB holders ).


Last time, Binance customers were targeted. In 2019, hackers stole $40 million worth of bitcoin. Binance's response was exemplary, immediately assuring customers that all affected would be compensated. And that's exactly what happened. They've even launched an insurance fund since then, with the goal of compensating customers if something like this ever happens again.


Unfortunately, with an emerging technology like cryptocurrency, such things are inevitable to happen. With companies like Binance assuring their customers that their funds are always safe, this perceived risk is obviously mitigated.


However, this is only possible with a certain degree of centralization. In a fully decentralized world, such an exploit would go unpunished. I don't have to be hypothetical here - customers are constantly being robbed and there is rarely any compensation.


As I said before, decentralization is a wonderful thing. But this episode is an unkind reminder that there are risks involved, and as the industry pulls together, innovates, and figures things out, consumers need to keep that in mind.

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