Exchange Security
Web3 / cefi
The set of technical, operational, and procedural safeguards implemented by cryptocurrency exchanges to protect user funds and data from theft, hacks, and unauthorized access. Exchange security is a critical concern given the history of major exchange hacks—Mt. Gox (850,000 BTC, 2014), Coincheck ($530M, 2018), FTX (insolvency through misappropriation, 2022), and dozens of smaller incidents—collectively representing billions in losses. Best practices include: cold storage for the majority of customer funds (offline, air-gapped), multi-signature wallet requirements for large withdrawals, proof-of-reserve audits demonstrating solvency, advanced KYC/AML and account monitoring for suspicious activity, DDoS protection, and regular penetration testing. Regulatory requirements under MiCA and US frameworks increasingly mandate security standards for licensed exchanges. Example: Coinbase reports holding approximately 97% of customer assets in cold storage (offline hardware wallets), with only a small fraction kept in hot wallets to service daily withdrawal demand—a security structure that limits the exposure from any single hack. Why it matters for Web3: Exchange security failures have caused the largest single-event losses in crypto history and represent the primary counterparty risk for users of centralized exchanges. Security practices are a critical due diligence factor when choosing which exchanges to trust with assets.
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