Top DeFi Cybersecurity Risks You Need to Prepare For
According to DeFi Pulse, the decentralized finance market has amassed Crypto assets worth $100 billion. The industry is attracting thousands of new users every year looking to grab a piece of the decentralized (autonomous) trading pie.
However, the exponential rise in Crypto trading through several exchanges and platforms has made the industry susceptible to malicious activities, with thousands of criminals now adopting Cryptocurrency, non-fungible tokens, and other blockchain assets as an alternative to FIAT currencies and centralized (regulated) assets.
Therefore, in this post, we’ll share the top DeFi Cybersecurity risks you need to prepare for to ensure your Crypto and blockchain assets are safe and secure.
Understanding DeFi Cybersecurity Risks
DeFi is a blockchain-based alternative to conventional, centralized financial systems that eliminates the need for a third party or intermediary to facilitate the trade and offers direct reconciliation for Crypto transfers.
One of the key aspects of this unconventional system is that it involves the use of smart contracts stored on a blockchain that execute automatically as soon as the predetermined conditions or terms of the contracts are met.
However, these program-based contracts are just code, meaning they’re susceptible to hacks as Cyber criminals can employ different strategies to breach the DeFi ecosystem using decoding apps and gain access or control of it.
5 DeFi Cybersecurity Risks Every Crypto Asset Owner Needs to Prepare For
1. Coding Errors
As mentioned above, smart contracts are made of code, meaning they’re susceptible to hacks caused by human error during the programming process. In recent years, there have been many high-profile cases with millions of dollars worth of Crypto assets stolen due to exploited loopholes in smart contracts.
Moreover, since these errors are unrelated to their respective blockchain, the transactions are generally accepted and irreversible unless the hacker initiates a second transaction. Although the DAO Attack in 2016 on the Ethereum blockchain was reversed through a ‘hard fork,’ this extreme measure isn’t available for everyone.
Therefore, you need to perform a smart contract audit using a powerful scanner or by hiring an experienced blockchain developer/third-party service before initiating a transaction.
2. Wrong Liquidity Pool Estimates
Another popular security risk in the DeFi market is the miscalculation of the token value in the liquidity pool. Since these pools evaluate the value of tokens using the existing token composition and not external oracles, attackers can create flash loan attacks. These attacks simply introduce imbalances in the pool composition, which results in incorrect calculations.
Simply put, hackers could drastically reduce the value of a liquidity pool and claim ownership of Crypto assets for pennies compared to their real worth.
3. Stolen Private Keys
Another growing problem in recent years is the theft of private keys that enable access to blockchain accounts via pin codes. Many users store these keys in flash disks, their computers, or even printouts to protect them from being compromised. Moreover, in many cases, these keys don’t need to be physically or digitally stolen from users.
For instance, MetaMask is a popular platform for creating private keys. However, like most software applications, it is also susceptible to malicious activities. Hence, many users simply use a malicious version of the tool and expose themselves to threats. Many users also use predictable security codes to secure their assets, enabling hackers to use their information and research to guess them.
4. Ponzi/Rug Pull Schemes
Ponzi schemes have become quite popular in the centralized finance market with multi-level marketing and other pyramid strategies. Unfortunately, rug pulls, and Ponzi schemes are making their way into the decentralized finance market. These malicious maneuvers entail blockchain developers abandoning DeFi projects and running away with the investors’ money before or during the product.
5. Front-Running Attacks
Finally, we end our list of top DeFi Cybersecurity risks with front-running attacks. If you’re an avid Crypto or blockchain user, you may have noticed that transactions don’t appear instantly on the ledger since they’re broadcasted on the entire network. The time taken during these transactions is when these attacks happen. By leveraging several tactics, such as the Miner Extractable Value, the attackers create a clone or variant of the transaction with a higher fee.
Since transactions are typically arranged according to the fees, this allows them to gain access to the original transaction while the decoy transaction is accepted by the chain.
So, there you have it – 5 DeFi Cybersecurity risks every Crypto asset owner should be aware of in the post-pandemic digital age. The decentralized finance industry is rapidly becoming mainstream, with thousands of users joining different exchanges and platforms. These new users, unlike their veteran counterparts, are becoming easy targets for criminals and losing millions of dollars collectively every year.
By learning about these threats and more, they can take the necessary proactive and reactive measures to protect their assets. For instance, many businesses and individuals with blockchain projects have opted StaySAFU’s audit service to test, report, and fix any issues in smart contracts before they’re executed.
Feel free to get in touch to learn more about our audit process and other services/solutions.