With Cryptocurrency theft having increased over 500% from 2020, its easy to say there is slim chance the global digital economy will see any decline in theft and fraud in the space anytime soon. With over 15 billion dollars stolen from investors in 2021 alone, “Rug-Pulls” as they have come to be known are flooding the Cryptocurrency market, specifically the DeFi sector, and they’re scamming investors at an alarming rate. With the increase in crypto scams the phrase “Do Your Own Research”, or “DYOR”, is more important than ever.
Data from a recent study shows that over 75% of stolen funds in 2021 were taken from self proclaimed “DeFi” protocols, those which were, unbeknownst to investors, not decentralized by any means. These token projects often make away with millions of dollars, through elaborate liquidity siphoning methods, or simple exit scams. Sadly, scamming was the greatest form of cryptocurrency-based crime in 2021, followed by theft; examples include crypto exchanges being hacked, personal devices being compromised, or usernames and passwords being phished. With the increase of crypto scams and theft, there is a rising importance to blockchain & smart contract security and the auditing of these new projects protocols. These kinds of security audits ensure that protocols deployed are safe for the public and investors. Teams of Blockchain specialists such as Dxentral offer multiple levels of security auditing for projects using Blockchain or smart contract protocols, as well as detailed security analysis and Modern Application Penetration Testing for cryptocurrency apps. Allowing projects and companies to verify that their contracts are free of errors and vulnerabilities.
The Wild West of Finance
With the rise of crypto along with the scams and hacks that come with them, a particular kind of crypto has been taking over the space, and its called DeFi.
Decentralized finance, or more commonly referred to as “DeFi,” is a cryptocurrency trend that first began to gain traction in 2020, though the idea of “Decentralized Finance” has been around before even Bitcoin, 2021 was a record breaking year for DeFi Protocols, where thousands of cryptocurrencies on networks like ETH or BSC sprung up looking to cash in on people looking for the next crypto that would go “To the Moon.” DeFi is being called the“Wild West” of the crypto world for good reason, and that’s because people are essentially getting robbed of their hard earned money by projects that at first glance, seem legitimate, but in the end they escape with thousands or millions of dollars from investors. Along with legitimate DeFi projects and companies, alot of these projects claiming to be part of Decentralized Finance end up being scams or exploited due to one thing; centralization. Such as one, or few wallets holding a large supply and cashing out, while new investors lose money, or a project having a wallets key comprised, where by then a hacker will be able to transfer the wallets contents to an exterior wallet, one where the funds will now be owned by the hacker. Another red flag a project can have is what is referred to as “Whale Dominance,” Where a very small amount of wallets (usually the team or an inner circle of early adopters) hold a very large percentage of the supply. Even if a project publicly shows in its “token distribution” if in the token distribution the team owns 70% of the Total supply, that is a red flag; especially if these team tokens are not locked for any time. Newcomers to crypto can be unaware that a token or coin is mostly owned by early adopters or team members, and buy in as the “whales” drop the price taking profits. Any and all investors can alleviate loss by only invest in cryptos with extensive audits. As adoption grows, it’s important to educate people on the risks of investing in the relatively new market of cryptocurrencies without doing due diligence.
Rise in Adoption = Rise in Threats
In 2012, there were approximately 2.2 billion active internet users. In 2017, active internet users reached 3.8 billion people; nearly 48 percent of the world’s population. Currently there is roughly 5 billion active Internet users across the world, with there projected to be more than 7.5 billion Internet users by 2030 ( Which is 90 percent of the projected world population of 8.5 billion in 2030.)
Currently, the vast majority of U.S. adults have at least heard a little about cryptocurrencies like Bitcoin or Ethereum. A report from 2021 indicates that 16% of Americans say they personally have invested or traded a cryptocurrency of some kind. With the increase of Blockchain and Smart Contract services, and as adoption increases, so do the security threats to such protocols; along with the threat off the loss of the funds of the investors.
Cryptocurrencies have their supporters and detractors, but they are reshaping the world of finance and the world economy as a whole. Blockchain technology is having an impact on many sectors, not limited to that of cryptocurrencies themselves. Blockchain applications are being developed for education, trade, and other areas; with increase in adoption, increase in the amount of scams, thefts, and hacks rises.
Blockchain is expected to create a new economic system by revolutionizing the way we communicate over the internet. The decentralized nature of blockchain creates the new concept of a token economy in which the community’s revenue can be allocated to the actual content producers and service users who create value.
The arrival of blockchain technology has created a substantial popularity for smart contracts. Though still relatively new, Smart Contracts play a very essential role in Blockchain, they help to make transactions taking place more secure, as well as function in an organized manner.
Blockchains, Cybersecurity, & Decentralization
There are three features in blockchains that make them inherently apart of cybersecurity: decentralization, immutability, and transparency.
In a decentralized system, by definition, there is no single main server. All information is shared between all the participants in the system. These are the nodes that host the blockchain. New nodes can be installed at any time, but it means downloading the entire ledger so every node has the exact same information. Besides sharing the same information, the nodes work together to ensure that the data is intact; unchanged (here’s where the immutability feature comes in). If there is no single server and all nodes are constantly verifying the information, this makes the system very secure. A potential hacker that wanted to alter any data would have to hack most of the nodes in the blockchain at the same time; this is near-impossible.
Having the data spread out over many nodes also improves availability. Since there is no single server, then saturation because a lot of people are trying to read the data at the same time is less likely and decreases, even more, when new nodes come online.
Transparency is something that can be seen as an advantage or a disadvantage, depending on the situation. All transactions on a blockchain are publicly visible, meaning that the data on the blockchain isn’t usually encrypted. If you go to a Bitcoin blockchain explorer like btc.com, you can see every transaction that has ever occurred on that blockchain.
The Need for Increased Blockchain & Smart Contract Security
Smart contracts, collections of code that carry out a set of instructions on the blockchain, are essential for most crypto-based projects to run, and will quickly become an important part of everyday life in the coming future.
When investing in a crypto project, especially a newer project, it’s important to see if the project has had its code audited. Companies like Dxentral offer Smart Contract audits that analyze a projects contracts code, then report any vulnerabilities or weaknesses within the project, along with give recommendations on how to alleviate such issues.
In August of 2021, When “Poly Network,” a DeFi platform that connects different blockchains was hacked, experts said that the hacker was able to exploit an issue with the coding of the network. This exploit resulted in over 600 million dollars being able to be stolen; though in this extremely rare turn of events, the hacker ultimately returned the stolen funds. It was one of the biggest cryptocurrency hacks ever on record.
That’s why its always important to do your own research, as well as keep up to date with a project. A few red flags when looking at a crypto project can include applications that don’t share their code to the public, projects that ignore concerns from their community and social feeds about security risks, or fairly obscure projects that operate with unlocked liquidity pools.
Rather than FOMO’ing in without researching a project, it’s important to remember to be cautious always when investing. There are many examples of why it is worth looking for projects that take safety precautions, and have their code continuously audited by teams of specialists like Dxentral. A blockchain security audit allows for better transparency for a project, helps gain and secure community trust, and certifys that a project has had their code examined by a reputable team of experts such as Dxentral. An Audit aims to uncover if there are issues in a project’s development, such as human errors in the code, malicious activity, or if it’s possible for a person to control the network or its funds.
As cryptocurrency adoption grows, investors must continue to practice safe and secure habits like the ones listed in this article in order to protect their assets.
Need cryptocurrency consulting? Or a security audit for your project? Contact Dxentral by email, or on any of the platforms listed below.
