The real weakness of a centralized exchange in cryptofinance is the unknown. The unknown attempt at theft makes the digital exchange no different than any other financial institution, like a bank or credit card company. There are far too many people in the world who, oftentimes even by their own admission, are thieves. Plain and simple. Take the current woes of Mt. Gox. And, trust the fact that Mt. Gox’s troubles run deep and are are much greater than a software glitch. This little software glitch has all but obliterated the largest, longest running cryptocurrency exchange. What was really done was nothing new and yet at the same time it was. A new vulnerability was exploited. That, by itself, is absolutely nothing new. Mt. Gox has, in the past, most assuredly been hacked and its users have fallen prey to many, many scams. Imagine during the early days of banking how many bank accounts were liquidated due to forged documents? During the “Wild West” era of the American westward expansion many, many banks had their vaults emptied by thieves in the night. It is unavoidable. Large amounts of wealth, whether physical or digital, attracts thieves. Thievery of vast amounts of wealth has been one of the greatest motivators for creativity in the history of mankind. Mt. Gox, should it survive, will find itself[and those who rely upon it] the future victim of many more creative and sometimes successful hacks and scams.
So what exactly is the real weakness again? It’s the act of storing vast amounts of valuables in a single place. That’s the weakness. Pile up the treasure and people will try to steal it. And, they will continue trying until they succeed. You simply cannot stop people from attempting to steal. And, to top it off, the greater the value is…the more ingenious and stringent the attempts will be. One does not need a degree in sociology nor an intricate understanding of cryptofinance to see this as plain, simple, everyday common sense. Which came first the lock or need for the lock? Kind of a pointless question really. The reliance upon promised security has always had its risks. How about Stanley Rifkin’s 1978 looting of Security Pacific National? I’ll bet that doesn’t ring a bell. He was the first of his kind. He used electronic means to steal. 10.2 million dollars to be exact. But, he really wasn’t a “bank robber,” so to speak. He simply solved a problem based on the ill-fated notion that one particular string of numbers was secure. He used the bank’s daily “secret code” to divert the 10.2 million. The bank was totally unaware of the theft until the FBI arrested Rifkin while he was trying to convert the stolen funds into diamonds…over a month later. Time magazine called it the “Ultimate Heist.” During the same year, the famous Lufthansa Cargo Heist went down. While drastically different in their approach, one used guns and one used brains, they both ultimately attained their goal: the theft of millions of dollars. The real weakness was and still is storing immense amounts of value in one location which, in essence, lights a beacon for thieves.
So, how do we solve this problem, at least as to how it affects cryptofinancial institutions? Easy. Eliminate the need for a centralized exchange server. Period. Stealing from many separate entities at once presents an infinitely more complex problem to solve than stealing from one static or stationary source. That’s not to suggest that the problem could not still be solved. But, it certainly presents a much more complex problem to solve. And, it also gives each node of value the opportunity to defend its own value as opposed to relying upon the security of any given exchange for the validity of every hash in the chain. Looking for the solution? Try altchain.org.