Interest is growing in the structures of centralized exchanges (CEX) and decentralized exchanges (DEX) after Bithumb mistakenly paid 620,000 bitcoins—worth more than 60 trillion won—to 249 event winners. Bithumb holds about 40,000 bitcoins, meaning it gave customers bitcoins it did not even hold.
According to the financial authorities on the 11th, the Financial Supervisory Service is looking into whether reconciliation checks are being done properly in its inspection of Bithumb. Reconciliation means book balances and actual balances match, and Bithumb recognized the erroneous bitcoin payouts only tens of minutes after the fact, prompting criticism that reconciliation checks were not being done properly.
CEX such as Upbit and Bithumb hold users' virtual assets and broker trades. Investors create an account with the exchange, deposit won or virtual assets, and buy and sell through the exchange's internal system. Even when assets are bought and sold on a CEX, they are not reflected on the Blockchain in real time, and transactions occur only on the exchange's electronic ledger. Recording all transaction histories generated on the Blockchain is called on-chain.
Afterward, like banks or securities firms, they perform work to match ledger balances with actual balances, but Bithumb reconciles only once a day. Upbit and Korbit are said to reconcile every 5 to 10 minutes.
On the 6th, Bithumb paid 620,000 bitcoins to 249 event winners, about 14 times more than the number of bitcoins it holds (about 46,000). Bithumb was able to promise customers more bitcoins than it holds because it does not record transaction details on the Blockchain in real time. Until it is reflected on-chain, bitcoin is not actually paid out; it is essentially a promise that exists only on Bithumb's internal ledger.
Before reflecting on-chain, Bithumb canceled 99.7% of the bitcoin payouts. The remaining 1,788 were transacted before cancellation, and Bithumb had to purchase 1,788 bitcoins externally to match its books and balances. If Bithumb does not reconcile its books and balances, normal business becomes impossible due to sanctions from the financial authorities.
CEX concentrate all records and withdrawal authority, offering speed and convenience, but large-scale accidents can occur if internal controls fail, system errors arise, or hacking incidents occur. CEX such as Mt. Gox and Bitfinex went bankrupt due to hacking, and FTX also shut down after a bank run caused by operational failure. Last year, a newly listed coin on Coinone experienced extreme price swings due to a system error.
DEX do not have the exchange hold customers' assets. DEX users create personal wallets and deposit assets into those wallets. Transactions are executed on the Blockchain through smart contracts according to predefined code. Unlike the ledger-based method of CEX, all transactions occur directly between parties, making it structurally impossible to pay customers coins that are not held, as in the recent Bithumb incident.
However, if there are few users, virtual asset transactions may not proceed smoothly. There is also the drawback that creating a personal wallet on the Blockchain and executing smart contracts is complex and difficult.