The blockchain industry has witnessed rapid growth and innovation over the past decade, offering new ways to handle transactions and data and expanding the possibilities of digital ecosystems. However, as the industry has attracted a massive amount of investment, it is a constant target for cybersecurity threats.
In 2022, $26.2 billion of venture capital was invested in blockchain and cryptocurrency companies, while the cryptocurrency market capitalization based on the number of value of coins and tokens in circulation exceeds $1 trillion. Successful hacks can lead to hundreds of millions of dollars in funds being stolen. This puts companies, investors and users at risk and threatens the institutional and mainstream adoption of the technology.
Some recent numbers illustrate the need for more robust cybersecurity measures in the Web3 industry:
- Web3 lost over $890 million to security incidents during the third quarter of 2023, with hacks accounting for $540 million of those losses. The third-quarter losses exceeded the total for the first half of the year — about $330 million in the first quarter and $333 million in the second quarter, according to research published by Besoin.
- Decentralized Finance (DeFi) has proven to be highly susceptible to hacks, accounting for 72.9% of all crypto-related losses. The amount of cryptocurrency stolen from DeFi protocols increased by 59.9% year on year in the third quarter, according to Immunefi’s Crypto Losses in Q3 2023 report.
- In September 2023, Hong Kong-based DeFi project Mixin Network experienced the largest DeFi hack of the year to date, losing an estimated $200 million in a breach of its cloud service provider.
As blockchain applications continue to expand, these types of breaches are likely to continue. While Web3 business leaders tend to focus on growing and scaling quickly and in a cost-effective manner, this tends to come at the cost of adequate security and technology integrity.
But, it is imperative that blockchain companies prioritize cybersecurity to safeguard the industry from the evolving threats in the digital landscape and provide investors, partners and users the confidence they need to make their projects viable in the long term.
Understanding the Significance of Cybersecurity in Blockchain
Blockchain technology is built on the principles of transparency and decentralization, which make it a powerful tool to provide the infrastructure for various applications, including cryptocurrencies, supply chain management, and smart contracts. However, these attributes also present unique security challenges.
- Immutable transactions: Once data is verified and recorded on a blockchain, it is virtually impossible to alter. This immutability means that security must be enforced from the outset to prevent fraudulent or malicious activities.
- Digital assets: Blockchains often contain valuable digital assets, such as cryptocurrencies, non-fungible tokens (NFTs) and digital identities. Ensuring their security is essential to protect users’ investments and sensitive personal data.
- Smart contracts: Smart contracts, which are pieces of automated self-executing code, are essential to most blockchain applications. Vulnerabilities in contract coding can lead to security breaches that result in significant financial losses and legal disputes.
- Trust and adoption: Widespread blockchain adoption relies heavily on trust. Security breaches and vulnerabilities can erode trust, limiting the widespread adoption of the technology.
Sipan Vardanyan, co-founder and CEO of cybersecurity consulting firm Hexens, told Techopedia:
“It’s time for the industry to recognize that one of the keys to adoption is cybersecurity at a grassroots level and projects take the appropriate steps to address that. We can’t expect institutions and everyday users to trust projects with their funds if they aren’t highly confident that their assets will be safe from theft.”
Key Strategies to Enhance Cybersecurity in the Blockchain Industry
What can blockchain industry players do to ensure that networks have robust cybersecurity measures in place?
Strong Encryption and Cryptography
Cryptography is the bedrock of blockchain security. Using strong encryption techniques and cryptographic algorithms is paramount. Secure management of cryptographic wallet keys, data encryption, and robust authentication protocols are vital components.
Regular Security Audits
Blockchain platforms, smart contracts, and decentralized applications (dApps) should undergo routine security audits by independent security firms. These audits help identify vulnerabilities, weaknesses, and potential exploits.
According to Vardanyan:
“Despite the number and magnitude of Web3 hacks over the past few years, blockchain projects often do not apply a concerted effort into selecting trusted and reputable partners to conduct their security reviews—meaning they often face severe risks of hacks even after the review has been completed.”
“In order to adequately ensure their safety as well as that of their users, projects should not limit themselves to an audit of their smart contract code. To minimize risk, projects should select a trusted security partner that can conduct a comprehensive security review that extends beyond the core code and who can, more broadly speaking, adapt their solutions to the constantly evolving cybersecurity landscape and the Web3 market’s needs.”
Code Review and Best Practices
Developers should adhere to best practices for writing secure code. By making their codebase open source, blockchain projects can benefit from community code reviews, where experts inspect the code for vulnerabilities. Developing libraries and templates with secure coding practices can expedite this process.
Choosing the Right Consensus Mechanism
The choice of consensus mechanism is a fundamental decision in the design and operation of a blockchain network, and it has a significant impact on the security of the protocol. The two most common mechanisms are Proof of Work (PoW) and Proof of Stake, which each have their own security features and vulnerabilities.
While PoW is known for its robust security, it is not entirely immune to cyber attacks. One of the most common is the 51% attack, in which an entity or group controls over half of the network’s computational power, enabling them to potentially manipulate the blockchain, leading to double-spending and other malicious activities. PoS is more resistant to Sybil attacks, in which an attacker creates multiple fake identities to control a network.
Selecting the mechanism most suitable for a specific project and ensuring it is secured is vital. The choice should align with the project’s objectives, technical requirements, and potential threats. For instance, a public blockchain with high-value digital assets may opt to use a PoW mechanism, whereas a private enterprise blockchain might favor PoS to maintain efficiency and limit the potential for network centralization.
Ethical hacking can help to identify and rectify vulnerabilities in applications before cybercriminals can find and exploit them. Employing skilled penetration testers is a proactive approach to strengthening blockchain security.
Regular Updates and Patch Management
Blockchain software and protocols evolve, and security vulnerabilities are often discovered after they launch. Regular updates and patch management are vital to address security flaws as soon as they are identified and improve overall system resilience.
Implementing decentralized identity solutions can help protect user data and privacy. These systems give individuals control over their personal information, mitigating the risk of identity theft and unauthorized access.
Education and Awareness
Promoting cybersecurity education and awareness within the blockchain community is key to ensuring all stakeholders understand the risks and best practices. Users, developers, and project maintainers should stay informed and vigilant.
October is Cybersecurity Awareness Month, a collaboration between government and private industry to raise awareness about digital security. The four key themes this year are:
- Use strong passwords and a password manager
- Turn on multifactor authentication
- Recognize and report phishing
- Update software
Practicing the basics of cybersecurity can help all users keep their data private and protected.
Robust cybersecurity is essential to the development on growth of the blockchain industry. As blockchain technology expands into various sectors, addressing the evolving cybersecurity challenges it faces is crucial for developers and businesses to engender trust in the community.
By implementing robust encryption, conducting regular audits, following secure coding practices, and staying updated on emerging threats, the blockchain industry can fortify its defences to fully realize its potential.