Kraken, a well-known crypto exchange was recently affected by a software bug. This cryptocurrency exchange software bug had allowed users to buy Bitcoin at prices cheaper than the market price.
Crypto exchanges continue to face challenges, and this recent event turns the spotlight back on them. It also highlights that the cryptocurrency ecosystem has work to do so far as crypto exchanges are concerned.
Cryptocurrency exchange software bugs aren’t new, and highly prominent exchanges like Coinbase had such bugs too. Observers continue to highlight the impact these have on the crypto market sentiment.
Blockchain, the technology that underpins cryptocurrencies is secure and transparent. Hackers need to incur a heavy cost to attack a blockchain network, which acts as a deterrent.
However, different cryptocurrency projects use different blockchain networks, which might have different technology stacks. As a result, cryptocurrency blockchain networks don’t communicate with each other.
You can’t transact with Bitcoin on the Ethereum network. Crypto exchanges emerged as a solution to this interoperability challenge.
These exchanges enable crypto traders to deal in different cryptocurrencies, moreover, traders can buy/sell crypto against fiat currencies. While that helped, crypto exchanges have inherent challenges.
Fundamentally, crypto exchanges are centralized websites, therefore, they carry all the vulnerabilities that centralized systems have. These exchanges aren’t blockchain networks, therefore, they are vulnerable to cyberattacks.
There were many instances of crypto exchange hacks, e.g., the Coincheck exchange hack, Binance hack, etc. However, that’s only a part of the bigger picture, as the Kraken exchange bug shows.
Cryptocurrency exchange software bugs: Posing serious questions
Crypto exchanges are software. Even the best software will inevitably have bugs, and that’s well-known. The question that bothers the crypto market observers is how robust the very fundamentals of crypto exchanges are.
Blockchain had promised decentralization, however, centralized crypto exchanges go against this grain. They effectively act as banks for cryptocurrencies, whereas a key motive behind Bitcoin was to stay outside the control of the traditional banking system!
Banks operate under stringent regulations, and they are answerable to their customers as well as regulators for their actions. As a result, banks need to maintain a high degree of transparency. Banks also need to regularly upgrade their IT infrastructure, and they use modern technologies to guard against cyberattacks.
Crypto exchanges operate outside of regulatory frameworks, and their IT infrastructure often lacks the requisite security features. When security incidents happen, as they inevitably do, crypto exchanges don’t face the regulatory scrutiny as banks do.
The bug in Kraken
The recent bug in Kraken exchange highlights this well. Kraken is working on releasing a new feature, and the bug in question is in that work-in-progress release. It allowed traders to buy Bitcoin for $8,000 whereas the market price for Bitcoin on that day was over $10,000!
Some traders bought Bitcoin for $8,000 from testers, while some others sold it for $12,000. Kraken took to Twitter, the microblogging site to explain the bug and its impacts.
The company confirmed that the liquidity in the system wasn’t exhausted, and Cointelegraph reported quoting a spokesperson from Kraken that orders worth $100 were executed. The statement by Jesse Powel, the CEO of Kraken was interesting, to say the least!
The bug attracted criticism, as you would expect. Powel took to Twitter in response to the criticism and pointed out that stop orders, the printing of trade, etc. worked correctly. He also indicated that it’s not possible to find all the bugs despite rigorous testing.
It’s worth noting that a bank in the traditional world of finance will face far higher scrutiny when such software bugs impact its customers. You can also expect a more detailed response from the senior leadership of the bank, highlighting the corrective and preventive actions they intend to take.
The way forward for crypto exchanges
The crypto market is still relatively new. Investors are demonstrating a lot of interest in it, and it will likely grow manifold.
Crypto exchanges will need to upgrade their IT infrastructure, security features, software development and testing processes, and overall accountability measures. They need to uphold the trust that the crypto traders repose on them, and that’s the right way forward.
