Written by: Dmytro Volkov, CTO of the international cryptocurrency exchange CEX.IO.
A crypto exchanges technical infrastructure has much in common with traditional exchanges and trading firms. Trading stocks, commodity contracts, cryptocurrencies or any other financial instrument requires basically the same technical solutions and faces very similar problems. However, there are some notable differences.
Hardware and Software Maintenance
Traditional exchanges allow trading 6-8 hours a day, 5 days a week. This schedule provides a 16-hour window each day to do any maintenance of technical infrastructure, and full weekends. Crypto exchanges usually operate 24/7, and it’s much more difficult to maintain such a system. It requires a special design of all technical components to operate non-stop.
Sometimes crypto exchanges face outages because of long non-stop operations, but traditional exchanges usually do not face such issues simply because they do not operate on a non-stop 24/7 basis. Crypto exchanges do most of the technical maintenance non-visible to the end user and without outages. However, some other complex work requires short outages that become visible for the end user.
Traffic Load and Burdens on Exchange Infrastructure
Traditional exchanges usually allow access only to professional players like brokers and big firms. Traditional exchanges have a much wider audience than any crypto exchange does, but usually its spread between brokers, prime brokers, managed funds, and other players, which decreases direct traffic for the exchange.
A regular individual has no chance to interact with a traditional exchange directly and has to rely on his broker.
On the other hand, crypto exchanges are more accessible and allow direct access to almost any individual, even with a $100 account.
This leads to very high traffic being concentrated at the crypto exchange. Ironically, in terms of traffic, crypto exchanges are more centralized than traditional exchanges, because crypto exchanges allow direct access to individuals and small traders. Such high traffic leads to more frequent outages, especially during hype periods.
Correlation Between the Number of Users and the Protection Requirements
Both traditional and crypto exchanges have very high-security requirements. However, crypto exchanges face fraud and hacking incidents much more frequently, especially when taking into account that a crypto exchange is accessible almost to everyone. This leads to the exchange either getting hacked, or becoming more secure and implementing more features to protect itself. Sometimes, attacks are simple denial-of-service attacks, which could lead to outages. Hostile environments like this force crypto exchanges to become more secure, usually much more so than traditional exchanges.
Storing Client Assets
Traditional exchanges usually provide only trading services and other related services, but do not store client funds. Traditional exchanges rely on clearing firms, depositaries, and other external parties to store client funds and assets.
Crypto exchanges store most of the crypto funds by themselves and maintain the process of automatic deposits and withdrawal. It is a complex task, especially related to decentralized blockchains and sometimes it suffers from outages as well.
We use highly secured offline cold wallets and online hot wallets. Hot wallets contain just a small fraction of user funds, and require 2 signatures from independent expert systems to increase security.
CEX.IO protects access to user accounts using 2FA, operation notifications by e-mail and SMS, automatic activity monitoring and additional verification using KYC in case of suspicious operations.
The exchange complies with high-security standards like PCI DSS level 1 (highest level), undergoes annual external technical audit, and conducts penetration tests for our system several times per year. All the data inside CEX.IO infrastructure is encrypted.
Complexity of Technical Solutions for Instant Transactions
In traditional exchanges usually spot trading happens with a T+2 rule, which means settlement (moving funds and assets between trade parties) happens 2 days after the trade happens. So there is no such thing as instant fund withdrawals right after the trade on a traditional exchange.
Crypto exchanges often do conduct settlement just moments after the trade happened. This requires more complex technical solutions which are much more difficult to maintain.
So, crypto exchanges and traditional exchanges have much in common in terms of technical infrastructures. It might seem that crypto exchanges have more outages and are less reliable, however this happens because of more advanced services in crypto exchanges, like non-stop operations.
Crypto exchanges, despite their name, mostly have centralized infrastructures. Sure they have backups, replication across different servers and data-centers for security and high traffic reasons, but they are centralized as a company is operating them.
Theoretically, there might be a distributed open-source team of anonymous developers to maintain a crypto exchange’ infrastructure, but such projects are very complex to maintain and are much less secure than is required for crypto exchanges.
There are few truly decentralized crypto-to-crypto exchanges (so no fiat money there), but almost all fiat-related crypto exchanges are centralized.
Featured image via Pixabay.