Whenever something unusual happens, rumors always spread first, regardless of the conspiracy theories behind the exorbitant fines. Everyone was amazed that @binance had to consume hundreds of ETH to consolidate a wallet, which seems a bit “outrageous”. However, it is not difficult to understand based on the logic of exchange business. Let me explain my views.
Exchanges manage a large number of EOA deposit addresses. Every time a user deposits coins, the assets are transferred to these fragmented small addresses. Usually, exchanges need to “consolidate” these addresses for unified asset management. Exchange address consolidation business usually has two options: 1) Whenever a user makes a deposit, the program immediately transfers the corresponding assets to a hot wallet address. However, the problem is that a user’s deposit demand may be divided into multiple transactions. For example, a whale usually transfers a small amount first and then gradually transfers the rest for security reasons. Obviously, this solution is prone to more TXS, and if the exchange adopts this consolidation plan, it will have to bear the high gas fees when the gas price is high, resulting in high transaction fees. But the advantage is that the entire consolidation process is decentralized, and it is imperceptible to the user’s end. For the exchange, it is just a normal business cost.
2) After the user makes a deposit, the small EOA addresses remain unchanged for a period of time. If the user withdraws coins again, they are directly withdrawn from the large hot wallet. Then, after a fixed period of time, an address consolidation is performed. This method helps reconcile the accounts and facilitates unified asset management. Furthermore, it can be done at a time when gas prices are relatively low. However, there is a difficulty in doing so: a large number of operations in a short period of time can easily drive up gas prices, and once it attracts media attention, it can easily trigger a public relations incident. It is difficult to explain to the public why the exchange needs to consolidate assets, especially when it has consumed so much gas.
Clearly, Binance has adopted the second address consolidation plan. From the perspective of exchange business logic, regardless of which plan is chosen, there will be a significant loss of business funds, and each exchange’s asset management strategy may be different. To facilitate understanding, I have selected two addresses, Binance14 and OKX3. Binance14 adopts the second plan, while OKX should adopt the first plan. However, the asset volume and trading volume of the two addresses are significantly different, so the data is for reference only.
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In Figure 1, the total asset size managed by the Binance14 address is nearly 110,000 ETH. As a receiving address, it has consumed a total of 10,000 ETH in gas fees. On September 13th, during a major consolidation, the daily gas consumption was 388 ETH, and the highest daily consumption in history was 871 ETH. Therefore, it is normal business loss for address consolidation to consume millions of ETH. Let’s not jeopardize the jobs of those responsible for consolidation just because we don’t understand it.
In Figure 2, the asset size managed by the OKX3 address is relatively small, but it has consumed 1,530 ETH in gas fees as a receiving address. From the graph, we can see that OKX’s daily consumption is relatively balanced, with a peak of only 15 ETH in a day. This indicates that the first consolidation plan is carried out during normal times. As for which plan is better, exchanges will definitely calculate and optimize their own choices. There is no company that does not pursue cost optimization. Although Binance is a big brother, they won’t give up on optimization. Note: The above data observations are for educational purposes only. My understanding of exchange business may not be completely accurate, so please take it as a reference.
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