The $6.3bn Binance hack shows how centralised crypto has become

The writer is a professor at Cornell University, senior fellow at Brookings and author of ‘The Doom Loop’

The cryptocurrency revolution bore the promise of the decentralisation of finance, taking power from the hands of commercial banks, central banks and governments and putting it in the hands of common people. Single points of failure would be eliminated through a decentralised architecture. The transparency of public digital ledgers would heighten security. Trust would emanate from community oversight rather than through the traditional financial intermediaries that had often betrayed the faith put in them.

The massive $6.3bn hack of Binance, the world’s , is just the latest example of how these lofty promises have been subverted by centralisation. This heist seems to have been enabled by a combination of human foibles (a compromised laptop) and technological vulnerability, a combination that always proves potent in the hands of antagonists.

Blockchain technology, which underpins the cryptocurrency revolution, must be given its due. These digital ledgers on which cryptocurrency transactions are recorded have themselves not been breached and remain secure. This is remarkable because their management is not supervised by any entity. In fact, the security of blockchains is derived from their decentralisation and transparency. Public blockchains associated with cryptocurrencies such as Bitcoin and Ether have made it possible to securely execute not just payments and simple trading transactions but even complex ones facilitated by smart contracts, all through computer code and without any intermediaries.

It is instead the ecosystem that has grown up around decentralised blockchains that has introduced technological vulnerabilities.

Human psychology plays a part — it appears that trust in computer algorithms goes only so far. Despite having access to decentralised exchanges and other alternatives, crypto investors and traders keep significant shares of their assets in centralised exchanges such as Binance. These provide custodial functions and facilitate trading, in addition to serving as on- and off-ramps with traditional financial institutions.

Exchanges give customers what they seem to be looking for — convenience, a sense of familiarity and the reassurance that things that go wrong will be fixed. But they also introduce centralisation in what is meant to be a decentralised environment. This subverts the promise of eliminating single points of failure. The hack of Binance is the largest so far, but only one of many that have affected this corner of finance.

Automated transactions for even massive amounts of money can be executed with few guardrails to ensure their legitimacy. The veneer of security through transparency that has been championed by crypto enthusiasts is entirely based on technology, so technological vulnerabilities strike at its heart.

Consider oracles, pieces of software that allow information to be exchanged. Each blockchain is a closed, siloed environment, giving oracles a crucial role in decentralised finance. For instance, writing a smart contract based on a company’s stock price or a real-world event like weather outcomes necessitates such information exchange.

The integrity of contracts and transactions on a fully secure blockchain can be compromised if the available oracles convey unreliable or untimely information. Oracles are created and supervised by the community rather than official regulators, which is their strength. But it is also their weakness. Even the watchful eye of the crypto community cannot fully protect this software from skilled hackers.

Moreover, the balance of power is tilting in favour of the antagonists. AI is turbocharging the ability of hackers to probe and exploit subtle flaws in various parts of the crypto ecosystem, especially at points such as exchanges where crypto activity is centralised. The scale and scope of such attacks are likely to intensify as hackers from North Korea and elsewhere gain access to more powerful tools and an expanding crypto ecosystem increases the potential rewards available.

Binance will probably survive this hack and, as with previous hacks, some people will lose money but the crypto world will move on. Still, the event should still serve as a wake-up call not just for the proponents of crypto assets and decentralised finance but also for financial regulators and governments. They must find a way to protect their citizens from a spiralling loss of trust that might spill over into traditional financial markets.