The recently discovered vulnerability of the Bitfinex trading platform encouraged users to question the security measures of the multi-signature technology and companies offering such protection to exchanges.
While BitGo and other exchanges including Bitstamp reassured users of their multi-signature protected platforms, bitcoin experts reinstated that regardless of the add-on security measures of a platform, exchanges are subjected to hacking attacks because of their reliance on hot wallets.
Essentially, an exchange is an instantaneous trading platform which is required to send and receive funds immediately upon the settlement of orders. To carry out these orders, an exchange often handles the private keys of user wallets, providing the other private key to the user and/or to a third party multi-signature protection platform like BitGo.
Most times, this security measure is sufficient to prevent major security breaches and money laundering, as the exchange and third party protection platform conduct secondary and tertiary authentication before signing any funds.
However, a sophisticated malware or attack on even a slightly vulnerable platform such as Bitfinex can allow hackers to gain control of the funds, leading to the loss of user funds.
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