The Three Layers of Cryptocurrency Exchange
Cryptocurrency existed in 2009 from the establishment of the first digital currency, Bitcoin. Bitcoin is the first decentralised cryptocurrency. A decentralised structure operates without servers, and each participant can complete transactions. In а blockchain, each participant accomplishes a task such as storing transactional data. A group of members can even operate a substitute version called a fork. The fork would function by the same regulations as the original decentralised system but would have a distinct state.
This article will cover the organizational structure of cryptocurrency security. Let’s ponder into each layer. Reputable and trustworthy platforms are a must for every investor.
First Layer: Tokens and Coins
The security in the crypto world is primarily based on the security of the protocol. When selecting a digital currency, you are also embracing all the risks connected to the protocol. If someone can determine and utilise protocol lapses, they will settle the entire platform and you, and it will not be necessary which wallet or exchange you are using.
The two different types of currencies are:
Coins- Ethereum, Bitcoin, Bitcoin Cash, etc.
All the ICO issued tokens.
The distinction between the two lies in technical aspects. Coins are either autonomous network protocols or copies (forks).
When you find a cryptocurrency protocol from a security standpoint, try to notice if it can be centralized. If a network is centralized, the participants have the potential to compromise the whole platform. The indication here is that when you are searching for proof-of-stake cryptos, remember to take a look at the source. Since whoever holds the primary stake can vote for transitions, the network will trust those with greater stakes.
All tokens are established on a smart contract feature of other coins, so their security and trust are found on the parent cryptocurrency first and eventually on the code of the smart contract that provided it. Generally, all the tokens (ICO coins) are from Ethereum, and few of them are supplied by smart contracts in other digital currencies. This is just a gentle reminder that Ethereum was hacked due to a DAO protocol and then hard forked going back to the state. This incident indicates that the creators of Ethereum can go back to that time again if needed and that the system is not decentralised.
Second Layer: Exchanges
The exchanges are written in traditional code construction security that is not involved with blockchain. The exchange is a typical centralized web service based on a data server. Exchanges are associated with trust and credibility. Every time we hear news about security incidents, it will always boil down in exchanges. Investing in proper security measures promotes an effective exchange. The responsibility of the crypto owner is to look at the security part of the exchanger networks and examine if the exchange you are selecting participates in any of the bug bounty programs.
Third Layer: Wallets
Wallets may seem familiar to you, as you have heard and encountered countless times when understanding the crypto world. So, let’s further discuss it here.
Two options when selecting a wallet for digital currencies:
Hot wallet (e-wallet or like the account in exchange)
Cold wallet (paper, hardware, or software)
If you have chosen a hot wallet, your coins are under the control of your wallet provider, not yours. For accounts in crypto exchanges they are accounts that are reachable through traditional protocols that are regularly outside of a blockchain system completely. For instance, in proof-of-stake cryptocurrencies, another hot wallet source or the exchange will receive all the commission in a GAS currency you have due to coin holding.
Despite the assertion that cryptocurrency is based on security, its security breaks down where the construction is not rooted on the blockchain or the theories of being disseminated are violated. Crypto exchanges, mining pools, and digital wallets are not created as parts of several blockchain protocols. In addition to this, numerous blockchain protocols are not decentralized or have shortcomings in decentralization. When the integrity of your funds depends on some particular technology, such as blockchain-built protocols, it is worth the endeavor to ponder in the security chain, starting with the protocol, followed by the exchange, and then the wallet. Always use a reputable trading platform.