Security issues have dominated the cryptocurrency industry since the introduction of bitcoin and the subsequent emergence of altcoins. While the industry is growing in popularity year by year, the number and severity of scams, hacks, and other security concerns – especially through crypto exchanges – are also on the rise. Chainanalysis reported that $1 billion worth of cryptocurrencies was stolen in 2018 by criminals.
One thing to note is that not all cryptocurrencies and their vulnerabilities are the same. The ability of a hacker to attack a cryptocurrency project varies from blockchain to blockchain. While some cryptocurrencies have had their blockchains or their underlying codes hacked, the bitcoin blockchain, for instance, has proved unhackable so far. The only known real-life vulnerability being the creation of 92 billion bitcoin from thin air in 2010, which was later canceled and had the blockchain rolled back to its pre-hack state.
Nevertheless, bitcoin and so many other altcoins have been stolen. If most of their blockhchains cannot be hacked, how do hackers still manage to steal these digital currencies? It turns out exchanges have been the playing grounds for these crypto criminals. This depicts the end result of running decentralized systems on centralized platforms. According to cryptocurrency hardware wallet manufacturer Ledger, over $1.5 billion worth of cryptocurrencies have been stolen through these exchanges.
As we brace ourselves for crypto adoption and the increase in trading of digital currencies, criminals are equally tightening their tactics, and the attacks on crypto exchanges are not something that is going to stop any time soon. The good news is, one crypto startup is out to solve the problem, and it’s doing it with blockchain technology.
Lightning Network for crypto exchanges and traders
Arwen is a blockchain startup created to solve the security issues in the cryptocurrency trading market. Previously referred to as Commonwealth Crypto, Arwen the platform allows crypto traders to take control of their assets whiles they are engaged in trading activities on exchanges, through a second-layer protocol.
Motivated by the Lightning Network, Arwen aims to solve the biggest security loopholes that have caused crypto assets to be stolen from centralized exchanges. If you are a bitcoin enthusiast, you’ve probably heard of the Lightning Network – a protocol that creates a layer on top of the bitcoin blockchain, enabling fast and cheap transaction processing. Arwen has leveraged similar technologies used in building the Lightning Network for its layer-2 protocol for crypto traders and exchanges.
Instead of putting their cryptocurrencies into an exchange’s wallet, Arwen allows traders to deposit their crypto coins into an on-blockchain escrow. What makes Arwen’s solution laudable is that trading is fast because it doesn’t occur on the blockchain (off-chain trading) and the crypto kept in escrow backs each individual trade.
Using the Arwen Deamon, which can be downloaded onto a user’s local machine, traders are able to access the Arwen Trading Protocol and use it for storing crypto without engaging a third party. Thus, allowing for a non-custodial cryptocurrency trading. Among other things, the Arwen Deamon’s operations include the execution of cryptographic operations in its trading protocol, store secrete trading keys, as well as posts and validates transactions from relevant blockchains.
In essence, Arwen makes it possible for traders to leverage the liquidity of centralized crypto-to-crypto trading exchanges without giving the custody of their assets to the trading platform in question. These traders maintain their own private keys and crypto assets, and their trades are instead backed by an on-blockchain escrow. For instance, the agent of escrow for bitcoin is the bitcoin blockchain. Arwen’s blockchain protocol is built to allow for the lowest common denominator of blockchains. This means it backs bitcoin-derived coins without SegWit support and therefore supports coins such as LTC, BCH, ZEC, ETH, as well as ERC-20 tokens.
If a cryptocurrency exchange is hacked, users who use Arwen’s software will not be affected because their crypto is not on the exchange. These users will be able to access their funds by broadcasting a special transaction onto the blockchain. Just like the Lightning Network, users of Arwen can leave the bitcoin blockchain whenever a problem occurs.
Arwen goes beyond security to tackle DEX issues
Beyond the security solutions, the off-chain trading startup hopes to solve some of the problems faced by today’s decentralized exchanges (DEX).
The issue is, decentralized exchanges are still slow because transactions have to occur on the blockchain. Apart from prolonging latency and the validation time for transactions, on-chain transactions, in some cases, end up increasing processing costs for transactions. Additionally, liquidity on DEX is very low, largely because of the validation time or network fee. And this is where Arwen’s solutions come in – they allow traders to enjoy the liquidity of centralized exchanges whiles leveraging the security of decentralized exchanges through off-chain trading.
Although Arwen has made strides in solving crypto trading problems, from security and fast transactions to liquidity, the startup still has some issues to tackle. In order for Arwen users to trade smoothly, crypto exchanges are required to lock up an equal amount of the cryptocurrency that a user wants to trade using Arwen’s escrow protocol, which requires users to pay for the collateralized fee. Apart from the additional fees to traders, Arwen does not support trading instruments that rely on margin trading.
For now, Arwen has launched its testnet with support for Bitcoin, Bitcoin Cash and Litecoin. Also, cryptocurrency trading platform Kucoin will integrate the Arwen protocol. With a 24-hour trading volume of about $4.5 million at the time of writing, Kucoin’s integration will help Arwen to enter the crypto trading market in style.