Bithumb's Mistaken Payout Incident and the Pros and Cons of Ledger-Based Trading Systems
Overview and cause of the incident
Recently, an incident occurred at Bithumb in which, while trying to give out points worth 2000 won as event prizes, a configuration error caused it to pay 2000 bitcoin (BTC) per person.
At the prices at the time, this amounted to hundreds of billions of won, an incident in which bitcoin far exceeding Bithumb's own market capitalization was credited electronically.
The core cause of this incident lies in the nature of the ledger-based trading system.
What is a ledger-based trading system?
A ledger-based trading system is very similar to the way we use banks.
- Concept When users buy and sell bitcoin, coins do not actually move on the blockchain. Only the numbers in the exchange's central database (ledger) change.
Example: If A sells 1 BTC to B, the exchange adjusts A's balance by -1 and B's balance by +1 in its ledger. No movement occurs in actual bitcoin wallets (on the blockchain).
Why use ledger-based trading?
- Speed: Sending actual coins on the blockchain takes at least 10 minutes to an hour, but ledger-based trades are executed in 0.1 seconds.
- Cost: There are no blockchain transfer fees (gas fees), so trading costs are low.
Problems revealed by this incident (phantom coins) Ledger-based trading has a fatal flaw: numbers can be entered electronically regardless of actual holdings.
Even if Bithumb does not actually hold 2000 BTC, if a system error enters 2000 in the ledger, it appears as a deposit on the user's screen.
This is called paper bitcoin or phantom coins. If users try to sell them and cash out, the exchange may not be able to pay out real money and could face bankruptcy (a bank run).
Expected direction of future bitcoin and virtual asset policy
As a result of this incident, regulation by the financial authorities (the Financial Services Commission and the Financial Supervisory Service) will become stronger and more specific.
1) Stronger mandatory proof of reserves (PoR)
- Proof of reserves, which proves that an exchange actually holds 100% of the coins customers have entrusted to it, will become a legal obligation.
- Rather than a simple audit once a month, it is highly likely that exchanges will be required to prove their balances in real time using blockchain technology.
2) Introduction of internal control systems (kill switch)
- It will become mandatory to introduce a kill switch that automatically blocks all withdrawals when asset movements or deposits of abnormal size are detected.
- To prevent input errors caused by human mistakes, multi-approval procedures will become mandatory for transfers above a certain amount.
3) Stronger liability for compensation
- Even in the case of a simple mistaken deposit, the scope of an exchange's liability to compensate ordinary investors harmed by the resulting distortion of market prices will widen.
Crypto market outlook
1) Short-term outlook: distrust of centralized exchanges (CEXs) and price swings
- Investors will fear that their coins may in fact be an illusion that exists only in the exchange's ledger.
- As a result, more people may move coins from exchanges to personal wallets (cold wallets), temporarily reducing market liquidity and increasing price volatility.
2) Medium- to long-term outlook: a healthier market and sorting the wheat from the chaff
- Survivors: The market will be reorganized around large exchanges with fully equipped security systems and payment reserves, or exchanges operated by financial institutions (such as securities companies).
- Those left behind: Small and mid-sized exchanges that cannot afford the cost of building internal control systems will close.
- As a result, the market will become more like institutional finance (banks, securities), which in the long run could become the foundation for a stable upward trend in bitcoin prices.
Summary and conclusion
Bithumb's 2000 BTC mistaken payout incident exposed the bare face of ledger-based trading, where trades exist only as numbers.
As a result, regulations monitoring whether exchanges actually hold the coins will become very strong going forward, and investors will come to prefer safer, verified exchanges and custody methods.