March 4, 2024

Why exchanges delisting coins

If you haven't heard yet, the UK exchange CoinFloor has announced that it will no longer support any cryptocurrencies exceptBitcoin That is, they decided to close all trading pairs with BCH and ETH and concentrate exclusively on BTC. BitGo also no longer supports BSV - due to the hard fork, as a result of which all P2SH outputs will become invalid. This is positive news, and not least for the poor engineers responsible for updating and maintaining the performance of expensive nodes. These events mark the beginning of the trend, and in today's article, Jimmy Song talks about everything regarding support for altcoins by exchanges, and why exchanges can delist certain tokens.

Listing Economics

History of admission of coins to cryptocurrency exchangesfull of dirty episodes, beginning in 2013, when BTC-e, according to unconfirmed reports, included Novacoin in the list in exchange for a significant share of their premine. Since then, there have been only three ways for coins to gain access to the exchange:

  • Demand from Exchange Clients
  • Bribe from the token manager (usually from the founders or the foundation they created)
  • Hard fork claimed by customers

The first point is the most important sourcelong-term income of the exchange. Commission from transactions is what brings them the most money, and demand from customers is a good indicator of the expected profitability of the token admission to trading.

I offered you a bribe solely for reasons of courtesy, Your Honor.

Getting a bribe usually impliesone-time or very short-term income, since the demand for a token added in this way, if any, is unlikely to last long. Nevertheless, in the short term, profits can be very substantial, especially during the bull market, as low-liquidity coin houses tend to react to general optimistic sentiments with crazy pumps, which attracts the attention of traders.

Finally, as a result of hard forks there may benew coins are created, and exchange clients want to get their share of “easy money” from this. BCH and ETC were two coins that almost «forced» exchanges at least pay their customers the tokens they are owed, which has become, in essence, a veiled airdrop (free distribution of tokens). Again, these are very short-term phenomena, as once coins are dumped by people who are not interested in holding them long-term, trading volume for those coins tends to drop significantly.

Income

Further exchange considerations in terms ofThe profitability lies, among other things, in the fact that when listing a token, they run the risk of being cheated through something like a Sibyl attack. Verifying that there is real demand from customers can be difficult and require careful verification, which many exchanges simply do not do. For this reason, trading volume after listing is often disappointing.

In addition, the trading volume for justAn admitted to the exchange token can take away the volume from other trading pairs, which, in essence, means supporting one token at the expense of others. Finally, liquidity per each token as a result of admission to the exchange of new altcoins, as a rule, decreases, since the fact of listing the token usually does not affect the number of exchange customers or their money. This increases the spreads in trading pairs, which reduces the incentives for trading in them and ultimately affects the income of the exchange. This effect can be called a liquidity dilution.

Entrepreneur Evolution

In general, in the long run, revenue,which the exchange can receive from listing a token on the basis of a hard fork or receiving a bribe, is usually not worth it. Demand from clients usually provides a much better basis for admitting a token to the exchange, but it can be imitated or blurred due to too active addition of new altcoins.

Costs

Exchange listing costs vary independing on the nature of each token. It is known, for example, that maintaining an Ethereum node is very expensive, unlike a Bitcoin node. In addition, updating a node becomes a real problem with Koin hard forks. Hard forks require the suspension of equipment and its maintenance, being a constant source of costs. BCH and XMR carry out hard forks every 6 months, ETH - at least a couple of times a year (although unscheduled things happen, such as expected in January). Without updating the equipment, the exchange will not be able to verify transactions, and downtime will lead to a deterioration in user experience. BTC, on the other hand, never initiated hard forks.

As a result, providing BTC supportcheaper than supporting coins such as ETH. Ultimately, the cost of maintaining a coin is determined by the complexity of the system updates, and at some point it may turn out to be uneconomical or completely impossible, as happened in the case of BitGo and BSV.

Exchange Risks

If Token Listing Income Exceedsexpenses for its support, the advisability of admitting a token to the exchange may seem quite obvious, but this is also a rather short-sighted conclusion. There are many security risks associated with listing tokens, which also need to be considered:

  • Exchange Hacking Risk
  • Block reorganization risk
  • Risk of protection against replay attacks
  • Regulatory risks

Exchange Hacking Risk

There are countless stories about hacking exchangesmany, and financial - as well as reputational - losses for exchanges are usually large. Hacks can be internal (organized by an employee or some of the owners of the exchange) or external, or some kind of hybrid option. Since coin listing, by definition, increases the attack surface for any exchange, this factor must play an important role in deciding on a listing.

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Movie:

“If you overclock the Unix django, then you can get a basic didos root. Heck! It doesn’t work out ... But what if you try to decrypt their kilobits through the backdoor handshake, then ... the Jackpot!

Reality:

- Hi, I’m Robert Hackerman, the manager for “exposed” passwords.

- Hi Bob! How can I help?

Perhaps the most famous of these casesis the story of Cryptsy, hacked in 2014 [according to unconfirmed reports] as a result of listing a coin in which malware was integrated into the node software. The creators of the coin, apparently, used the node software to gain access to Cryptsy systems, after which they managed to withdraw 13,000 BTC and 30,000 LTC from the exchange.

To reduce this risk, it is necessary to carry outAuditing the code of each token, however, given how much code you need to learn, as well as the fact that sometimes the code is completely unavailable, this is not common practice. In addition, any updates to software products also imply the need for a new full audit in case of the addition of malicious code. Frequent forced software updates or hard forks add to the cost of implementing good security practices.

Block reorganization risk

Another significant in terms ofA security factor for exchanges is the risk of block reorganization. That is, the coin itself can be attacked, and attackers can use the exchange to withdraw funds or even as their source. For example, someone can place a large amount of PoW token with low hashing power on the exchange deposit, exchange these coins for a more liquid asset and withdraw funds. After that, an attack on the token register can be carried out in order to reorganize it in such a way as to cancel the transaction of replenishing the exchange account, that is, in essence, with the aim of double spending coins. Obviously, the success of attackers means losing a large sum to the exchange.

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Royal Banking Commission:

- So, does it mean that you use the most advanced systems for protecting the bank from malicious actions?

“Exactly so, Your Honor!”

- And literally no protection of the bank's customers from your actions, right?

- Well... um&#8230;

And, although there have been no real examples of this yet,It is also possible for a scenario in which those with control over a token deliberately cause trouble for the exchange by changing the register of their token through a hard fork. In the process of a hard fork, the rules of the protocol are completely rewritten, so, at least in principle, it is possible to withdraw funds from an exchange wallet solely through register manipulation - much like what was done in the history of ETH and DAO, only instead of an exchange in that case there was a wallet & #171;thief&#187;.

In other words, there is a risk thatcentralized token managers can withdraw these tokens from the exchange by reorganizing their own token register. Now this may seem very unlikely, but if the managers of a certain token at some point consider that the exchange is deliberately harming them, this may be enough for such a sharp answer.

Risk of protection against replay attacks

Another risk is that as a resulta hard fork of a certain coin a new cryptocurrency may be formed contrary to the expectations of the original coin community. That is how Ethereum split into ETH and ETC in 2016. Coinbase then, not expecting the ETC to survive, sent out transactions that did not have protection against repetition, and because of this lost most of the ETC, which they were subsequently forced to buy in order to pay their customers.

Regulatory risks

Finally, there are regulatory risks associated withwith certain coins. For example, AML / KYC laws can make listing sensitive tokens difficult. Difficulties can also arise if the token is considered by regulators as a security, which may impose restrictions such as admitting only qualified investors to trading. Since the regulatory requirements in each jurisdiction are different, the risks associated with them include not only the laws that exist now, but also those that may be adopted later, as well as the likely need to lobby for their interests.

The ideal token listing process

First and foremost, the ideal listing process.tokens implies the presence of strong demand from exchange customers, and long-term demand. The launch of the token, as a rule, is accompanied by a surge of interest, but subsequently it tends to decline, except in exceptional cases.

Secondly, you should audit the token code,then compile and run it in an isolated, safe environment. This process must be repeated for any update token-related software.

Thirdly, you need to install a large numberconfirmations of transactions or obtain guarantees from the creators of the token to compensate for any losses arising from the reorganization of the register or its complete reset.

Fourth, Coin must comply with legalstandards, both current and likely in the near future. In this part of the practice, exchanges are usually closest to ideal ones, since legal expertise is usually cheaper and more affordable than security examination of token software.

Conclusion

Considering all of the above, it is obvious that the exchangesdo not conduct sufficient security audits of tokens. Otherwise, the error in the December Ethereum hard fork (the developers simply forgot to cancel the “difficulty bomb”) would have been corrected in time and they would not have had to rush to plan another hard fork for January. But instead, it appears that exchanges are simply blindly running whatever software is provided by the Ethereum Foundation, or worse, relying on Infura.

Of course, we were aware of the risks, and therefore we carefully analyzed who we could put the blame on.

This means that only very few exchangesresponsibly approach the addition of tokens and that there should be much more cases of delisting, since cases of security problems become more frequent and trading volumes are reduced. Exchanges that hope to avoid major losses without proper audits are likely to eventually learn their lesson that hope and prayer are not the best security policy.

CoinFloor's decision to delist BCH and ETH (i.e.of all altcoins traded on the exchange) - this is not a special case. Over the past year, hundreds of delistings have been made, including BSV, Digibyte, and many others. The costs of supporting coins and the associated risks at some point simply cease to be justified if the exchange wants to survive. Given the reduction in trading volumes and increased risks for each individual token, we should expect not only an increase in the number of delistings, but also a decrease in the frequency of adding new tokens by exchanges, taking into account all the risks and costs associated with this.

 

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