Derivatives and crypto-exchanges: a history of success and defeat

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What are derivatives

The most complex financial instruments are derivatives. They are the best means of hedging and managing financial risks by improving liquidity and pricing during free exchange trading. Their mechanism of functioning is complex, therefore, commodity derivatives in Russia (Mosbirzha) remain the priority of professional traders … overseas. So, despite the geopolitical situation, the share of non-residents in the trading volume in derivatives is 49%. The underlying asset of these derivatives is oil. Since 2017, the market for derivative financial instruments around the world has grown to a gigantic size due to the unprecedented boom of a new underlying asset – cryptocurrencies. As of April 2018, the daily trading turnover of the crypt and its derivatives is about $ 7.6 billion. Impressive, huh?

Derivative financial instruments (derivatives) is a type of investment that allows individuals to buy or sell something with guaranteed conditions. An investor (trader) may not own the underlying asset that underlies the derivative (goods such as gold, oil, money, cryptocurrency, etc.), but with the help of an agreement with another participant, he makes a bet on the direction of the price movement of the underlying asset .

There are many types of derivatives, the main ones are futures, options, swaps. For the cryptocurrency market, futures are most characteristic. Hence the name – futures exchange.

Crypto futures are standardized contracts that are traded on cryptocurrency exchanges and are concluded between two parties with the goal of selling or buying an underlying asset in the future for a certain price. As a rule, futures are based on a spot (current) price and the difference between the current and future contracted prices is the profit or loss of the buyer.

It is believed that the first derivatives were created by farmers on the basis of barter. One side agreed to sell the goods and the other side agreed to buy it at a certain price on a certain date and all this was fastened only with a handshake. In the era of cryptocurrencies, the mechanism is even simpler, but, most importantly, it is not only right to analyze the situation on the market, but also to choose a exchange that will not be hacked tomorrow or which has undefined jurisdiction, and your funds can be frozen due to the banal reason for changing laws or verification.

 Cryptocurrency Exchange Issues

In December, bitcoin reached a record value of $ 20,000, and public investment in ICOs turned into a hobby for every IT professional. Over the past 4-5 years, many centralized exchanges have sprung out of nowhere and have provided powerful tools and opportunities for absolutely anyone to invest in innovative and useful projects. The friendly interface and low entry price instantly fell in love with hundreds of millions of people, so exchanges provided amazing accessibility for trading cryptocurrencies!

But it soon became clear that centralized exchanges were vulnerable due to their centralization. Crypto and blockchain pioneers did not expect that the cryptocurrency market mechanism would be based on several exchanges with staggering earnings on commissions (up to $ 3 million daily) and without guarantees of the complete safety of personal funds. The crypto community is periodically shocked by news about hacker attacks on exchanges and wallets:

2011

  • Allinvain, the first case of a major loss of 25,000 bitcoins from a private wallet
  • Bitcoin7, loss of 5000 bitcoins

2012

  • Bitcoinica, hacked three times in a year, losses of about 102,000 bitcoins
  • BitFloor, US-Russian exchange, loss of 24,000 bitcoins
  • BTC-e, the Russian exchange, the loss of 4,500 bitcoins
  • BitMarket.eu, loss of 18,788 bitcoins
  • Mt.Gox, the Japanese exchange, hacked for the second time in 2014, the total loss of over 750,000 bitcoins

2013

  • Vircurex, loss of 1,454 bitcoins
  • Inputs.io, loss of 4100 bitcoins
  • BIPS, loss of 1295 bitcoins of the exchange + all funds from user wallets (amount is not known)
    Picostocks, loss of 4100 bitcoins
  • Flexcoin, loss of 1000 bitcoins
  • Poloniex, the amount of loss is not known
  • Bitcurex, Polish exchange, the amount of loss is not known
  • Canadian Bitcoins, Canadian Exchange, $ 100K

2014

  • Moolah / Mintpal, loss of 3,700 bitcoins
  • Cryptsy, loss of 11,325 bitcoins
  • BitNZ, loss of 39 bitcoins

2015

  • Bitstamp, Slovenian exchanger, loss of 19,000 bitcoins
  • 796 Exchange, loss of 1,000 bitcoins
  • Bter, loss of 7,170 bitcoins
  • KeepCoin, loss of 3,000 bitcoins
  • Allcrypt, 42 bitcoins

2016

  • Distributed Autonomous Organization, loss of $ 60 million
  • ShapeShift, loss of 462 bitcoins
  • Bitfinex, loss of 120,000 bitcoins
  • CoinTrader, loss of 81 bitcoins
  • GateCoin, loss of 250 bitcoins
  • Bitcurex, loss of 2,300 bitcoins

2017

  • BTC-e, the Russian exchange was closed by FBI employees due to the laundering of stolen bitcoins from Mt.Gox, losses are unknown
  • NiceHash, Slovenian service, loss of $ 77 million
  • Tether, a loss of $ 77 million
  • Parity wallet, $ 310 million
  • CoinDash, a loss of $ 7 million
  • Yapizon, loss of 3816 bitcoins

2018

  • CoinCheck, Japan Stock Exchange, loss of $ 530 million
  • BitGrail, Italian stock exchange, loss of $ 170 million

All these precedents exposed traders and ordinary wallet holders to great vulnerability. The solution to this problem has long been known, it is, of course, decentralization! But until now, decentralized exchanges and exchangers have not taken root in the market because of their complex technical implementation and the high cost of projects. If we talk about derivative financial instruments, then so far only a few decentralized exchanges are available to professional traders and all of them are fairly crude projects with many shortcomings. There were rumors on blogs that a decentralized exchange is currently being developed by a Singapore-based company with a development office in St. Petersburg. Little is known about the project, in addition to the fact that the guys have already left Alpha, a large private investor is behind the platform and good prospects for attracting users due to the incessant hacks of centralized predecessors.

 

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