Can cryptocurrency be threatened by hacking attacks?
Cryptocurrency offers many positive opportunities, but because of its novelty and the money involved, it is attractive to hackers. The history of crypto is filled with high-profile hacking attacks that led to losses in the millions or even billions of dollars. Unfortunately, many companies, start-ups and investors have lost all their cryptocurrency funds to hackers.
So how can cryptocurrency be hacked and what can you do to protect your digital assets?
Learning more about cryptocurrency hacking attacks can help you defend against losing your hard-earned capital.
How do the security mechanisms in blockchain technology work? Blockchain technology has many built-in security features that make it difficult for hackers to manipulate data. Although a cryptocurrency hacker can take control of a blockchain, the most common way to steal tokens is through cryptocurrency wallets or exchanges.
Why is it so hard to attack blockchain?
First, blockchain operates distributed, which means there is no single point of failure. In addition, cryptocurrencies use advanced encryption technologies, public registries and consensus mechanisms to enhance security.
All transactions on such blockchains as Bitcoin (BTC) are publicly available. In fact, anyone who wants to run a node on the Bitcoin blockchain must download the entire history of Bitcoin transactions. The high degree of transparency helps prevent spurious activities such as sending invalid transactions.
Consensus mechanisms, such as proof-of-work (PoW) i proof-of-stake (PoS), help blockchain participants verify transactions without relying on a third party. PoW requires solving complex algorithmic puzzles to validate new transactions on the blockchain. In PoS, on the other hand, validators must lock their cryptocurrencies to the blockchain to confirm a new transaction.
Blockchain diggers or stakers are incentivized to follow the rules. Validators and miners are only rewarded in tokens if they perform their duties. In fact, many PoS chains will "penalize" a validator's cryptocurrency if the network detects an incorrect transaction.
To manipulate a PoW-based chain, one would need enough computing power to take control of more than half of the network. In the case of PoS, the hacker would have to invest more than half of the total staking pool.
Although hacking a blockchain is theoretically possible, in practice it is unlikely for large networks such as the following Bitcoin or Ethereum (ETH). If a hacker were to corrupt the blockchain, he would most likely focus on smaller altcoin projects.
What is the 51% attack?
Recall that a cryptocurrency hacker would have to take control of more than half of the blockchain to manipulate transaction history. This type of attack is called the 51% attack.
Most of the successful 51% attacks in the history of crypto have involved small or medium-sized blockchains. For example, hackers managed to take control of 51% mining power Ethereum Classic (ETC) At least three times in 2020. Hackers altered data in thousands of ETC blocks and got away with millions of dollars.
51% attacks are only feasible on smaller blockchains due to the lower cost of taking control of the network. In the case of the Bitcoin network, the cost of such an attack would be billions of dollars in hardware and electricity.
Can cryptocurrency be compromised by security vulnerabilities?
In addition to 51% attacks, experienced hackers can exploit vulnerabilities they find in the blockchain's code. There is always a risk that blockchain developers will make mistakes when coding their projects. If they are not detected in time, this can lead to millions of dollars worth of losses.
However, established blockchains such as Bitcoin are more resistant to attacks exploiting programming errors than smaller blockchains. For example, North Korean hackers exploited the new Ronin blockchain in 2022, stealing more than $620 million. Vietnamese company Sky Mavis created this Ethereum sidechain to reduce transaction fees on its popular game play-to-earn Axie Infinity.
What are the most common attacks on cryptocurrencies?
Since attacking the blockchain is relatively difficult, most cryptocurrency hackers focus on other aspects of the crypto ecosystem. Here are some popular targets of attacks by cryptocurrency hackers:
Cryptocurrency wallets Many hacking attacks rely on exploiting vulnerabilities in the code of cryptocurrency wallets. For example, hackers managed to empty Solana-based wallets in 2022 thanks to a bug in the Slope wallet. It is estimated that investors lost Solan tokens worth about $8 million as a result of this attack.
In addition to directly attacking cryptocurrency wallets, hackers can use phishing attacks to obtain personal information of wallet users. For example, users of the popular MetaMask wallet may have received phishing messages in 2022 asking for personal information. Often these types of messages ask users to hand over their cryptocurrency wallet's private key, allowing hackers to access funds.
Centralized cryptocurrency exchanges
Centralized cryptocurrency exchanges (CEX) store billions of dollars in cryptocurrencies, which is why they are prime targets for hackers. A famous example of an attack on CEX is the hacking of the Mt. Gox exchange.
In 2014, a hacker stole 850,000 BTC from an exchange. Mt. Gox, which ultimately led to Mt. Gox's board of directors declaring bankruptcy. It was not until 2022 that those affected by the hacking of Mt. Gox were able to claim a portion of their lost funds back.
The scale of the hack on Mt. Gox has forced the CEX to implement additional security and insurance measures. Most reputable CEXs store their crypto in cold wallets, and many employ additional security measures such as two-step authentication.
However, even large exchanges such as Coinbase, Binance i Crypto.com, have experienced significant hacks in recent years. The CEX technically owns your crypto until you withdraw it to a private wallet. While some CEXs offer insurance coverage, there is no guarantee that they will compensate customers in the event of a hack.
Smart contracts or "smart contracts"
Smart contracts are blockchain-based programs that can perform various functions without human intervention. A well-designed smart contract should be able to detect when certain conditions are met and perform its task. A few typical applications of smart contracts include token exchange on decentralized exchanges (DEX) and NFT broadcasting (intangible tokens).
As with the basic blockchain, the security of a smart contract depends on the quality of its code. If developers overlook details in the contract's code, a hacker can modify it and obtain cryptocurrency funds.
One of the most notable attacks on smart contracts was the so-called "DAO attack."
DAOs, or decentralized autonomous organizations, refer to the smart contract-based governance structure common in the DeFi (decentralized finance) sector. In the case of the DAO attack, the DAO refers to a specific Ethereum-based project that was used for decentralized venture capital funding.
In 2016, hackers managed to empty the DAO of about $60 million due to a weakness in the smart contract code. The incident led to the split of the Ethereum chain to compensate investors. Ethereum Classic is the original chain, while the split Ethereum became the world's second largest cryptocurrency.
Interchain bridges Interchain bridges are designed to move tokens from one blockchain to another. While the purpose of interchain bridges is simple, the technology behind them has proven difficult to perfect. Many high-profile attacks on crypto in recent years have taken place on this innovative technology.
For example, hackers managed to steal about $300 million from the Solana-to-Ethereum Wormhole bridge in 2022. Later, the interchain bridge on the Harmony blockchain lost $100 million to hackers.
Attacks from within Due to the anonymity of crypto, hackers are also anonymous. Many theories suggest that hackers are often the people who create the protocols. The idea is that they leave a loophole and wait for the value they can steal to increase before exploiting it. It is difficult to know the identity of the hackers.
Tips for keeping your crypto assets safe from attacks
You can't predict a crypto attack, but you can take measures to reduce the risk of losing your digital tokens to hackers and cybercriminals. Here are some tips to reduce the risk of losing your crypto:
- Never share the private keys of your wallet: Private keys allow anyone who has them to access the crypto stored in a digital wallet. That's why crypto owners must attach the utmost importance to protecting their private keys. When setting up your crypto wallet, write down this string of words carefully and store it in a safe place, such as a fireproof safe.
- Use two-factor authentication (2FA): High-quality crypto wallets and exchanges should allow users to enable 2FA through an authentication application such as Google Authenticator. Adding this second step to the login process reduces the risk of attack.
- Invest in a hardware wallet: Also known as "cold wallets," hardware crypto wallets store your private keys offline on a flash drive-like device. While these devices are not free, like many software wallets, they are less vulnerable to attacks.
- Be cautious of small and unknown crypto projects: It is safest to stick to crypto exchanges, token exchanges and dApps (decentralized applications) that have a large number of users and a long period of success. The smaller the crypto project, the more likely it is to be an easy target for hackers.
Here are a few more tips to keep in mind to secure your crypto assets:
- Avoid suspicious emails and links: Phishing is one of the most popular tactics used by cybercriminals. Always check that the sender's email address is correct and that links lead to authentic websites.
- Keep software and hardware up to date: Regular updates to portfolio software, operating system and hardware devices help ensure optimal security.
- Verify information sources: Make sure you use reliable sources of information, especially when it comes to investing in new crypto projects. Suspicious projects or scams often use tactics to appear more credible than they really are.
- Understand and control the risks: Crypto is inherently risky, and investing in unknown or small projects can carry even more risk. Understanding the potential risks and controlling your risk is the key to protecting your investments.
The future of cryptocurrencies is uncertain, but one thing is certain: cybersecurity will play a key role in the development of the industry. As crypto technology becomes more advanced, we must be prepared for possible security challenges that may arise as the market evolves.
Following these tips and staying vigilant can help safeguard your crypto assets and ensure a calmer future in this ever-changing market.