Why do crypto platforms block withdrawals from time to time?


FFollowing a recent period of heavy congestion on the bitcoin network, major cryptocurrency trading platform Binance halted asset withdrawals. It wasn’t the first time, and although withdrawals soon resumed after a brief pause, many people are left scratching their heads. Why are there such pauses? What is the reason for network congestion? And what action should retail traders take when pauses are announced?

Why Binance Press Stopped on BTC Outflow?

On May 8, Binance announced It had “temporarily closed #BTC withdrawals” due to a large amount of pending transactions, adding that its team was “working on a fix and will reopen $BTC withdrawals as soon as possible.” “

As quickly as possible, this happened only after 2.5 hours, followed by a second pause and a quick recovery. Many users who were either not paying attention or were in deep sleep due to their time zone may not have noticed. For others – particularly retail traders or those looking to use their BTC to cover payments – the news was a major cause for alarm.

When Binance’s process was back to normal, it sought to address the concerns of the concerned community by adjusting its transaction fees “to prevent a similar recurrence in the future.” The platform also noted that it is working on enabling BTC Lightning Network withdrawals, which will help in such situations in the future.

for the uninvited, lightning network There is a second layer operating on top of bitcoin, designed to lighten the load by enabling vastly increased transaction speeds and cheaper fees between participating nodes.

Understanding network congestion

So, why does network congestion happen in the first place? Essentially, this results in a significantly increased demand for a blockchain’s resources, resulting in slower transaction processing times and higher fees. Congestion can occur when there is a surge in trading activity or a sudden influx of users trying to withdraw their funds all at once.

In the case of the recent Binance Halving Bitcoin The withdrawals were a result of increased activity on the Named Network, mainly due to bitcoin trading/NFT minting via the Ordinal Protocol. This protocol allows users to add text, audio or images to bitcoin. [the so-called BRC token standard] And its popularity has played a major role in driving bitcoin transaction fees up 960% since the beginning of May.

David Tse, as co-founder of Babylon Chain And a professor at Stanford University explains, “Withdrawals have stopped in the past because transaction fees have increased 10-20 times. With the recent huge increase in bitcoin traffic from the issuance of BRC20 tokens, many transactions get stuck in the mempool.” are because they are not paying enough transaction fees for miners to be included in a bitcoin block.

The mempool to which Tse refers is essentially a waiting area for transactions sent to the bitcoin network, where they linger before being accepted into a block. Recently “perhaps for the first time in bitcoin history since 2017, the transaction fee in one block (#788695) exceeded the reward of one block (6.25 BTC).”

According to Tse, competitively high block space demand is a healthy development because it benefits the bitcoin miners who secure the network. “Since the block reward is halved every 4 years, the bitcoin security budget is reduced, unless transaction fees are increased to incentivize miners to keep the BTC chain secure,” he explains.

Of course, the processing capacity of bitcoin is quite limited compared to many blockchains. Transaction speed is a weakness rather than a strength, as it can only handle 7 transactions per second without the Lightning Network.

Can Withdrawal Blockages Be Avoided?

No matter what happens to them, the return halving isn’t exactly positive for bitcoin or the crypto industry in general. That said, Internet banking accounts regularly go down for maintenance, effectively preventing users from sending funds for short periods while work is done. So, it’s not a crypto-specific problem at all.

However, can withdrawal pauses be avoided? Trading platforms are between a rock and a hard place when there is network congestion, so it is perhaps no surprise that they temporarily freeze or limit withdrawals in order to maintain stability and reliability. Blocking withdrawals helps reduce stress on the blockchain network and ensures that transactions can be processed more efficiently.

“We cannot avoid the cap on withdrawals, but we can reduce our exposure to risk and uncertainty,” says Brighan Santos, Chief Operating Officer. Llama TechnologyA company that provides crypto banking services.

“We can do this by storing only the assets we are going to trade on the exchange and keeping the rest in cold storage. This way, we protect our assets from being hacked or stolen, as well as long-term or permanent freezes.” A trading pause can last from five minutes to several hours, depending on the circumstances.

However, network congestion is not the only reason why the platform may block crypto withdrawals. as Charmyn Ho, head of Crypto Insights bybit The exchange notes, “The centralized exchanges (CEX) have no more control over digital asset issuers than the NYSE has over the companies that list their stock for sale. So if a blockchain project decides to upgrade its system If this happens, the CEX will have to stop withdrawals – there is no way around it. That said, using a CEX with established and high-quality business practices and a great depth of liquidity minimizes the risk of withdrawals. May go.

How should retail traders respond to the pause?

If your bank suddenly told you that you cannot withdraw your capital, perhaps because of a run on its reserves, you would be horrified. But crypto retail traders are more accustomed to these pauses, as they have occurred many times before. Most platforms keep up with announcements and network traffic in order to anticipate withdrawal problems and plan accordingly.

Naturally, having a diversified portfolio can help mitigate the effects of network congestion on specific blockchains. Using multiple trading platforms (since it is unlikely that all will block withdrawals at once) is also a smart strategy.

“If you’re well-diversified in where you store your digital fortune, you won’t need to worry about withdrawal stagnation,” Charmin Ho explains. But there are other points to consider as well.

“When markets eventually reopen, the trading halt could lead to an increase in trading activity, which could lead to delays, slippages or technical issues,” says Brighan Santos. “You may want to wait for the market to stabilize and clear some backlog before placing new orders. This could take 12 to 24 hours after the halving.

Ultimately, the return of halving to cryptocurrency platforms is nothing new and, if you follow best practices, you should be able to ride these choppy waters without much difficulty. Ultimately, network congestion is not expected to go away anytime soon – although innovations such as the Lightning Network should help over time.

The views and opinions expressed here are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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