Why Exchanges Delist Coins

The Economics of Exchange Listing

Listing coins on exchanges has a sordid history, going as far back as 2013 when btc-e allegedly listed Novacoin in exchange for a significant portion of the premine. Since then, there have really only been 3 ways to get a coin listed on an exchange:

  • Demand by the customers
  • Bribe by the token’s central committee (usually the founder or foundation)
  • Hard fork demanded by customers

Revenue

Further considerations for an exchange on the revenue front are that they may be deceived into listing a token through something like an Exchange Sybil attack. Verifying that there’s real customer demand can be difficult and requires a lot of due diligence, which a lot of exchanges simply don’t do. The trading volume after listing is often disappointing for that reason.

Expenses

The costs for an exchange for listing a token varies. Depending on the nature of the coin, it may be cheap or expensive. It’s known, for example, that keeping an Ethereum node up is very expensive, whereas keeping a Bitcoin node up is not. Furthermore, upgrading becomes a real issue when a coin hard forks. Hard forks require downtime and maintenance which have continual costs. BCH and XMR have hard forks every 6 months, ETH at least a couple times a year (though the upcoming one in two weeks was unscheduled), and without upgrading, there’s no way for an exchange to verify transactions and downtimes create bad user experiences. BTC on the other hand, has never had a hard fork.

Risks for an Exchange

If the revenues of listing a token outweigh the costs of maintaining a token, it would seem obvious to list it, but that’s a short-sighted view. There are numerous security risks associated with listing a token that also have to be factored in:

  • Exchange hacking risk
  • Block reorganization risk
  • Replay protection risk
  • Regulatory risk

Exchange Hacking

The history of exchanges getting hacked is legion, and the costs tend to be severe. The hacks can be internal (by an employee or owner) or external (by an outside party) or some combination. As listing a coin adds to the attack surface of any exchange, this has to be a major part of the calculation.

Block Reorganization Risk

Another factor for an exchange from a security perspective is the block reorganization risk. That is, a coin may be attacked directly and attackers may use the exchange as a way to cash out. For example, someone may deposit a large amount of a low hash proof-of-work token to the exchange, trade them for something more liquid and withdraw. Afterwards, the token ledger can itself be attacked and reorganized as to cancel the depositing transaction, essentially double-spending the coins. This would obviously be very bad for the exchange, as they would be out a lot of money.

Replay Protection Risk

Another risk is the possibility that a hard fork of a given coin might create a new coin against the expectations of the community. ETH split to ETH and ETC in exactly this way back in 2016. Coinbase, for example, did not expect ETC to survive and thus sent out transactions which did not have replay protection and lost a lot of ETC which they then had to buy to compensate their customers.

Regulatory Risk

Finally, there are regulatory risks associated with a particular token. AML/KYC laws may make listing a privacy token especially hard, for example. Other regulatory concerns might be if a token is considered a security and the burden that might come with qualifying investors. As each jurisdiction has different regulatory requirements, risks here include not only laws that currently exist, but also laws that might come and the lobbying that might be necessary to prevent unfavorable ones.

The Ideal Process For Listing Tokens

The ideal process should require first, a strong customer demand. That is, not just short-term demand, but long-term demand. There is generally a ton of interest in a token right after launch, but that generally tends to taper off except in extraordinary cases.

Conclusion

Given the above, it’s obvious that there are not enough security audits going on at exchanges. Otherwise, the Ethereum bug from the hard fork from last week would have been caught by anyone competent. Instead, it looks like exchanges are blindly running whatever software that the Ethereum Foundation tells them to run, or worse, just relying on Infura.

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Jimmy Song

Jimmy Song

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Bitcoin Educator, Developer and Entrepreneur. Book: https://amzn.to/2RSlnTb PGP Fingerprint: C1D7 97BE 7D10 5291 228C D70C FAA6 17E3 2679 E455