Hello Friend, I want to invite you on a journey into the future, where we are not going to witness significant hacks on Bitcoin exchanges.
Have you ever heard about the properties of good money?
Durability, portability, divisibility… I suppose yes, they often come up during Bitcoin talks.
It is not a coincidence, if you think about it each and every Bitcoin project is about improving one or more of these characteristics, often in expense of others.
Durability, portability, divisibility, scarcity, acceptability and fungibility.
Why do I tell you this? What does it even have to do with exchanges not getting hacked? This model helps me answer the question: why do we have centralized exchanges in the first place?
Because Bitcoin’s performance in the portability category is not eligible. We need to wait about 10–60 minutes to be sure that transaction is final.
Now imagine a world where every Bitcoin transaction goes through in matter of seconds. Would the current centralized exchange model still be the best one? No.
Wouldn’t it be much better if exchanges would only hold the fiat and non-Bitcoin cryptocurrency balances of their customers? Every user could use their own decent wallet and would still be able to buy and sell fiat and altcoins instantly.
I should aslo mention exchanges would still hold some amount of bitcoins to provide liquidity, high frequency trading and other wall street magic services. Right now they are keeping about 98% of bitcoins of their customers in cold storage, so I estimate in my imaginary world they would need to keep only 2% of their today’s Bitcoin holdings.
I have some good and some bad news for you. The good news are with Lightning Network the world I described above will not be imaginary anymore, but real. The bad news are I lied in the title. Bitcoin exchanges will be still hacked, but these are not going to be relevant anymore. They will still hurt, but at least won’t crush the Bitcoin price, what is a good thing.
More bad news: the process of adapting the above described model will force some insolvent exchanges out of the market. Right now we have no idea how much fractional reserve they are doing. People were buying fake bitcoins for years on MtGox before it became obvious they are insolvent.
After the first company estabilishes itself in the lightning exchange model there will be very little excuse of keeping your bitcoins in fully centralized exchanges anymore.