According to the North American Securities Administrators Association’s (NASAA) annual survey of securities regulators, investments connected to cryptocurrencies and digital assets are the largest threats facing individual investors in 2022. With the rise in popularity of cryptocurrencies, the number of scams and hacks reported in the cybersphere has increased, making it essential for everyone interested in cryptos to know about.
Only about a month ago, hackers stole cryptocurrency worth $80 million from Qubit Finance, a decentralized finance (DeFi) network, in what is considered to be the biggest hack of 2022. And it hasn’t stopped there. Almost every week, a new data breach or exchange hack is happening.
The increased volume of crypto trades and transactions, therefore, demands greater responsibility and security on the part of both users and cryptocurrency exchanges. Unlike traditional financial institutions such as banks, if money is lost in the crypto market, it is lost permanently. As a result, the existing state of the market necessitates a greater demand for more secure transactions.
Because of people’s skepticism and uncertainty in the crypto space as a result of these frequent attacks, security in crypto trading is all the more important. If security in space does not improve, mainstream crypto adoption will not occur.
While blockchain technology provides a secure environment for cryptocurrency transactions, it has not rendered the crypto world immune to hacking and cyber-attacks. Despite cryptocurrency being predicated on security, the ecosystem’s security goes down if the infrastructure isn’t built on blockchain. Many blockchain protocols are also either not decentralized or contain decentralization weaknesses. Here’s LBank’s guide to crypto security.
Understanding the crypto security infrastructure
To better comprehend how and why security is compromised in crypto transactions, let us take a closer look at the three levels of security in a typical blockchain-based protocol.
1. Coins or Tokens
A protocol’s underlying coins or tokens form the first layer of security. When you choose a cryptocurrency, you agree to accept all of the protocol’s risks. This means that if someone can find and exploit protocol weaknesses, the entire network will be compromised, regardless of which exchange or wallet you use.
The second layer of security is concerned with crypto exchanges. Crypto exchanges are typically developed in custom code, with infrastructure security unrelated to the blockchain. This means that the exchange is nothing more than a standard centralized online service hosted in a cloud or data center vulnerable to hacking. This is also the primary reason why a large number of security problems and data breaches occur as a result of exchanges. Several crypto exchanges that exist today are quite new, and the majority of them have not yet invested inadequate security measures.
Wallets form the third and final layer of security in crypto transactions. Users typically choose between a hot and cold wallet when dealing with cryptocurrency transactions. Because it is connected to the internet, a hot wallet is vulnerable to cyber-attacks. Examples of hot wallets include web-based wallets, mobile wallets, and desktop wallets. Although all hot wallets are vulnerable to attacks, web wallets are the least secure of them all. And yet, despite definitively being the most vulnerable to attacks, most people choose hot wallets due to their ease of use and convenience.
On the other hand, a cold wallet is not connected to the internet, so while it is more secure, it is also less practical. Furthermore, while most hot wallets are free, hardware wallets can cost anywhere from $50 to $200. Stealing from a cold wallet typically necessitates actual custody or access to the wallet, as well as any associated passwords that must be used to gain access to the funds.
Undoubtedly, when it comes to cryptocurrencies, hackers have a lot of opportunities. Hacking the exchange application, hacking hot wallets, social engineering attacks, and other forms of crypto hacking are among the most common. As a result, regardless of how secure your second and third layers are, if there is a problem with the first layer of a protocol, the security of your funds will be compromised. Before entering the crypto trading space, investors need to understand that investments in cryptocurrencies are extremely risky speculations with a high risk of loss. Therefore, only invest in cryptocurrencies if you can afford to lose your money.