Cryptocurrency Exchange Fortification: Challenges and Strategic Solutions
In Brief
Velocore exchange lost $10 million due to blockchain security breach, highlighting crypto industry’s severity. More breaches are expected, requiring more resources for preventive measures.
Just days ago, the Velocore exchange lost about $10 million due to a security breach on its blockchains, highlighting the severity of security crises threatening the crypto industry.
Of course, this is not the first security incident we have heard about centralized and decentralized exchanges. Many hacking and non-hacking tactics have robbed the crypto industry of billions, especially the $1.4B disaster last year.
These security breaches have occurred, and will continue, until cryptocurrency exchanges dedicate a bigger part of their resources to covering blind spots and implementing preventive measures.
Currently, most attacks on crypto exchanges happen through one of these doors, some on centralized exchanges and others on DEXs:
- Smart contracts
- Chained Vulnerabilities
- Price Manipulations
Coding Errors & Flawed Smart Contracts
Despite their innovative nature, smart contracts are not foolproof. One of the most well-known cases is the reentrancy attack scenario, in which an attacker can call a function more than once before the first call is finished.
The same is true for CEXs in plenty of scenarios, which only goes to show that there’s still room for a security boost.
Overall, most issues come from these two sources:
Coding Holes
When it comes to security breaches, people usually expect something much more glorious than a coding glitch. Coding, while pretty basic, is still the foundation of any crypto project. Small mistakes in code may have a big impact on the bottom line. One good example is the 2016 DAO attack that lost $50M to hackers, only for a security hole in the code.
Lack of Proper Auditing
A lot of projects go live without a thorough audit by an outside party, which makes them more susceptible to vulnerabilities. An assault on the Ronin Network in 2022 almost destroyed Axie Infinity, stealing 173,600 Ethereum and 25.5 million USDC—nearly $700 million.
Chained Vulnerabilities
There are pros and cons to how exchanges and protocols work together. The more features they add, the more complicated connections they exhibit. A single breach in one protocol can cause problems in the others, sort of like the rotten apple situation.
Interoperability Crises & Compromised Integrations
A flaw in one protocol might have a domino effect on other protocols because of how interconnected they are. The Cream Finance breach of 2021 was just one more DeFi project compromised by opportunistic actors. The criminals stole assets valued at more than $130 million from other networks by taking advantage of a Security hole in the Cream Finance network.
The same scenario can pretty much apply to CEXs and their lack of due diligence when partnering with a third-party liquidity service or insecure wallets and payment gateways. Of course, centralized monitoring can cushion the damage in many cases.
Flash Loans
With flash loans, borrowers don’t need to put up collateral as long as they pay back the money all at once. Some bad actors have taken advantage of flash loans to artificially inflate prices on an exchange and steal money from weaker protocols that are susceptible to manipulation.
While the damage is often limited to DEXs, it can lead to similar market manipulations on CEXs, which will bring regulatory scrutiny and major blows to their reputation.
Price Manipulations
Playing unfair is the most basic trick in the book for any financial market. Centralized and decentralized exchanges are no different. They suffer in many ways, including:
Front-Runners
Hackers with a keen eye for profit might use bots to “front-run”—execute their deals at a higher fee—by spotting lucrative ones sitting in the pool. One good example is the Merlin DEX. To get control of the LP tokens, the hackers broke into the exchange and used a flaw in the smart contract. By pumping fake tokens into the pool, they drained the real ones from the exchange and left the exchange with massive losses.
Spoofing and Layering
Spoofers manipulate market prices by creating a deceptive appearance of supply and demand. They do this by placing large orders with no intention of execution, only to cancel them before they are filled. A similar tactic is known as layering, where traders place multiple orders at different price levels to give the false impression of significant market depth.
What are the Solutions?
While cryptocurrency exchanges are constantly working on boosting user security, it’s sometimes tough to keep up with hackers. But, they can bolster their framework with several measures:
Regular Audits & Bug Bounty Incentives
To find security flaws in DeFi apps like smart contracts before they may be used for bad purposes, thorough code audits are essential. Even the most experienced programmers might miss some security flaws and defects; thorough audits by trustworthy third-party security companies can help.
Bug bounty schemes also encourage security experts and white hat hackers to disclose vulnerabilities, which is crucial for the DeFi industry. In addition to bolstering security after launch, these steps prepare the soil for routinely updating and improving security standards.
Order-to-Trade Ratios
Traders are expected to maintain a fair ratio of orders made to actual transactions, and CEXs are tasked with monitoring and enforcing this ratio. After that, they need to penalize people who go over set order-to-trade ratios. This will stop people from placing too many orders without planning to execute them.
Layer 2 Measures
It is possible to reduce gas prices and traffic by using Layer 2 technologies. However, DEXs need to be careful that these solutions don’t make on-chain activities insecure or open the door to new vulnerabilities.
DeFi Insurance
Having insurance in DeFi is crucial because it protects users from losing money because of hackers, exploits, or other operational issues.
Users may rest easy and see DeFi platforms as appealing alternatives to conventional banking systems since they provide protection against a variety of threats.
Transparency & Reporting
Traders can better discern between fair and unfair behaviors if they have access to comprehensive market data and insights. Make it possible for traders to anonymously disclose market manipulation or questionable activities.
The criminals behind these operations are always one step ahead of the exchanges when it comes to technological innovation. In order to protect their clients from bad actors, these platforms must continuously develop and implement new security measures.
Disclaimer
In line with the Trust Project guidelines, please note that the information provided on this page is not intended to be and should not be interpreted as legal, tax, investment, financial, or any other form of advice. It is important to only invest what you can afford to lose and to seek independent financial advice if you have any doubts. For further information, we suggest referring to the terms and conditions as well as the help and support pages provided by the issuer or advertiser. MetaversePost is committed to accurate, unbiased reporting, but market conditions are subject to change without notice.
About The Author
Victoria is a writer on a variety of technology topics including Web3.0, AI and cryptocurrencies. Her extensive experience allows her to write insightful articles for the wider audience.
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Victoria is a writer on a variety of technology topics including Web3.0, AI and cryptocurrencies. Her extensive experience allows her to write insightful articles for the wider audience.
