The incident obviously sent shockwaves through the crypto world, but for me it also highlighted the dangers of decentralisation.
Don’t get me wrong. Decentralisation is arguably the single biggest pillar of everything upon which cryptocurrency is built. It is a concept which has a genuine chance to upend all that we know about finance, money and the economy at large. It can make the world a better place.
But the Binance incident highlights that in this early stage of cryptocurrency – let us not forget that Satoshi Nakamoto only wrote his Bitcoin whitepaper in 2008 – that decentralisation also poses some very real risks.
What happened with Binance and what has decentralisation got to do with it?
An attacker targeted the Binance chance late Thursday evening, with initial movements on-chain suggesting that two million BSC tokens were in their crosshairs.
BNB Chain estimate that over $100 million of assets were moved, but confirmed that $7 million in assets had almost immediately been frozen, reducing the total losses.
The decision to halt the entire chain is a stunning move from Binance. As I said, blockchains are meant to be decentralised. This episode shows that BNB is quite the opposite.
Obviously, this throws up all sorts of issues. The crypto purists are up in arms about the fact that this is literally one company running the entire ecosystem – the exact same as Web 2.0 and what crypto is supposedly trying to combat.
They have a point. Then again, the ability of Binance to freeze $7 million shows that, despite going against the mantra of crypto, centralisation does have its perks too. $7 million may pale in comparison to the total size of the breach here, but it’s still a hell of a lot of money. And this is still early days – there might be more confiscated by the time you read this.
An exploit on a cross-chain bridge, BSC Token Hub, resulted in extra BNB. We have asked all validators to temporarily suspend BSC. The issue is contained now. Your funds are safe. We apologize for the inconvenience and will provide further updates accordingly.
— CZ 🔶 Binance (@cz_binance) October 6, 2022
Will Binance’s reputation be harmed?
Binance operates from such a strong position in the market, as well as being marshalled by a highly popular CEO, that I actually believe this incident will be largely brushed under the carpet.
Binance even got hacked one time before. This is also technically a magical production of $100 million of BNB out of thin air, rather than a direct attack on consumers, an important distinction (although still terrible news for any BNB holders).
The previous time, Binance’s customers were targeted. In 2019, hackers stole $40 million in Bitcoin. Binance’s reaction was exemplary, immediately moving to assure customers that anyone affected would be compensated. And that is exactly what happened. They even kicked off an insurance fund since, with the aim of compensating customers should anything like this ever happen again.
With a nascent technology like crypto, these things are bound to happen, unfortunately. With companies like Binance, assuring customers that their funds will always be safe, that perceived risk is obviously mitigated.
But this is only possible with a degree of centralisation. In a fully decentralised world, an exploit like this would go unpunished. Indeed, I don’t need to be hypothetical here – customers have funds stolen from them all the time and there is rarely recourse.
As I said, decentralisation is a beautiful thing. But this episode is an unfriendly reminder that it also poses risks, and while the industry bootstraps itself up, innovates and figures things out as it goes along, customers need to bear that in mind.
Stay safe out there.