Blockchain, the technology behind cryptocurrencies, is one of the most advanced, having many promises. But it would be wise also to consider its vulnerabilities because there are several worth mentioning.
These vulnerabilities in blockchain could lead to significant losses if not properly managed, so anyone adventuring in the cryptocurrency realm should be aware of the risk. Many investors around the world have swarmed to digital currencies and, in particular, Bitcoin, enticed by the promise of fast returns. BTC and altcoins can, indeed, generate considerable riches, but one can lose it all in a second if they do not have the right security measures in place.
To employ proper cybersecurity, it is essential to understand what you are actually prone to, what blockchain security is based on, what kinds of threats exist, and more. So, let us shed some light on this technology.
Blockchain security
Bitcoin came into existence in 2009 – it is a decentralized digital currency, like most currencies of this kind, so it does not involve some third parties like financial institutions or governments to carry out transactions. It is also not regulated by such entities, meaning that transactions are made easier and speedier. Many individuals consider this the main advantage of cryptocurrencies and, thus, have taken this route, almost forgetting about fiat currency. Peer-to-peer transactions powered the rise of virtual currency, which further transformed into a vast digital landscape where blockchain tokens characterize anything.
Cryptocurrency blockchains like Bitcoin and Ethereum are public distributed ledgers that monitor and check all transactions in a blockchain platform. Any individual can see details about transactions, including the amount of money transferred and the pseudonymous addresses implied. Nonetheless, this does not make blockchain vulnerable; not everyone can access these transactions and submit or modify entries. Instead, this action is completed automatically by innovative programming, scrips, and an advanced transaction validation process.
Ok, but what exactly secures blockchain? It is cryptography. By means of cryptographic techniques, security issues are successfully addressed. Cryptocurrency’s secure, decentralized, and almost anonymous nature is supported by data encryption. This advanced technology makes blockchain one of the safest places to store your assets and carry out financial transactions. Encryption is part of cryptography and ensures the uniqueness of a blockchain. Through encryption, any transaction information is encoded and kept far from the eyes of the curious, hence, only readable to the intended recipient. Each newly generated block or input has a new output, so gaining access to the ledger’s encrypted data is nearly impossible.
An actual blockchain cannot, thus, be compromised or hacked, at least not in the traditional way of speaking. Someone will not just enter a malicious code into the chain and expect to hack it. The matter is much more complex, so let us see what one can employ to attack a blockchain.
Methods a blockchain can be compromised
A malicious actor or a hacker gang could gain control of a blockchain by influencing most of its computational power, commonly identified as hash rate. This rate is determined by the number of guesses per second and is mainly utilized to measure the security and health of a blockchain network. If these individuals gain access to more than half of the hash rate, they can enter an altered blockchain, a practice also recognized as a 51% attack. From this point, hackers can take over transactions and modify them before the blockchain validates them. For the blockchain to process a transaction, six blocks must record and confirm that transaction. Hackers usually take advantage of this feature in a 51% attack to compromise transactions and steal the money involved.
What happens to the altered blockchain they introduced into the system? Whatever they had programmed it to do. Sneaky, is not it so?
Where cryptocurrency hacks occur
Hacks can happen in either a wallet or an exchange, based on the type of storage chosen by the possessor. Cryptocurrency ownership relies on a long string of encrypted numbers that form a private key. In fact, there is one specific thing people must be aware of to avoid confusion – one does not store actual currencies but the private key of their token.
Whether you invest in Bitcoin, Ethereum, or any other digital currency, you need to store your coins somewhere. How to buy Ethereum may have been easy, but storing it is a bit complicated. You have to choose from two types of wallets – hot and cold or, if you want so, you can keep your ethers on an exchange. Whatever your choice, it is essential to be mindful of each storage method’s risk.
Wallets are nothing more than software applications installed on computers and mobile devices, so they can – and will be – hacked if you do not use a robust private key. This is where many thefts and hacks happen – a hot wallet which relies on an Internet connection. So, opting for a cold storage method is best if you want to keep your assets safe and sound. Some of the safest include hardware wallets (your keys are on a USB drive stick) and paper wallets, actual documents safety – and ideally – stored in a safe.
As for exchanges, they are even a weaker spot, as hackers can compromise a particular user account if they do not have a strong password.
Although cryptocurrencies use encrypted, secret messages, this sometimes does not stop hackers from entering a system and hijacking it. Blockchain projects are, indeed, secure, but there are still some vulnerabilities that put virtual coins in danger. If you find it hard to believe that this could ever happen to a blockchain, the following may change your view.
Here are the largest cryptocurrency hacks so far:
- Binance: $570 million
- Poly Network: $611 Million
- Ronin Network: $625 Million
- Mt. Gox: $473 Million
- Coincheck: $534 Million
- Wormhole: $325 Million
- Bitmart: $196 Million
- Beanstalk: $182 Million
- Nomad Bridge: $190 Million
- Wintermute: $162 Million