Why Do Exchanges and Swap Services Require Multiple Network Confirmations?
When depositing funds to cryptocurrency exchanges and swap services, users often encounter varying requirements for the number of network confirmations needed before the funds are credited. This often raises the question: why does it take so long and why are so many confirmations needed? The answer lies in two main reasons — ensuring systеm security and the exchange’s interest in holding users’ funds longer.
Security of Exchanges, Swap Services, and Platforms
One of the key issues blockchain networks face — which multiple transaction confirmations help mitigate — is block reorganization (forks), which can lead to the risk of double spending.
In 2017, the Bitcoin network experienced a block reorganization, where two parallel blockchains appeared simultaneously. Some transactions were initially considered confirmed but later ended up on the rejected chain and were reversed. Without waiting for multiple confirmations, users could have lost funds due to such chain reorganizations.
Double Spending
Double spending is the act of spending the same funds more than once. Until a transaction is fully verified and confirmed, the coins remain in the sender’s wallet. Between the time a transaction is sent and ultimately confirmed, there is a risk that a malicious actor could attempt to make a second payment with the same coins.
A user tries to purchase goods online and simultaneously sends the same bitcoins in another transaction. If the merchant does not wait for enough confirmations, they risk not receiving payment, as the first transaction could be reversed.
51% Attack
A 51% attack occurs when a malicious actor gains control over more than half of the network’s hash power. This control enables them to influence the ordering of transactions in blocks and potentially perform double spending, thus undermining network security.
In 2018, the Bitcoin Gold (BTG) network suffered a significant 51% attack, during which attackers managed to withdraw large amounts of coins by exploiting vulnerabilities. To mitigate such risks, exchanges increased the minimum number of confirmations required for withdrawing BTG to 50 blocks.
Holding Funds by Exchanges
Aside from security reasons, some exchanges intentionally require a high number of confirmations to hold users’ funds on their accounts for as long as possible, using these assets at their discretion.
This holding allows exchanges to conduct profitable operations with cryptocurrencies. For example, if a large deposit of a particular currency arrives at the exchange, the owners might sell these coins in advance to gain additional profit.
Moreover, the practice of holding funds complicates the work of traders who profit from price differences between exchanges (arbitrage). Long confirmation times prevent fast trades and reduce their opportunities for quick profits.
An arbitrage trader plans to quickly buy cryptocurrency on one exchange and sell it on another. If the first exchange delays funds due to the high number of confirmations, the trader loses the chance to perform a profitable trade due to waiting time.
Conclusion
Thus, the requirement for a large number of confirmations when accepting deposits is an important mechanism for protecting users and platforms from various types of fraud and technical issues. At the same time, it is a tool sometimes used by exchanges to manage liquidity and financial risks.