Blockchain technology has significantly advanced since the Bitcoin whitepaper was published in 2008. Since then, we’ve seen numerous cryptocurrencies emerge, as well as non-financial projects that use blockchain.
Although one of the greatest advantages of blockchain is its security, attention needs to be paid to certain risks. From phishing attacks to account takeover fraud (ATO), blockchain projects need to extensively work on their security to prevent these attacks from succeeding.
Of course, just like new technology that aims to protect individuals and businesses emerges, so do new cybersecurity threats. This article will explain blockchain security in-depth and go through some of the most common problems that blockchain faces.
Blockchain security explained
A blockchain is a digital ledger that stores vast amounts of transactions and data. The ledger is managed by a distributed network of computers that we call nodes. What’s characteristic of blockchain is that it’s decentralized.
Instead of being stored in a single location, data is dispersed across the said network of nodes. Decentralization makes the network secure, as even in the event of a failure, other nodes will still hold secure and accurate copies of the data. Furthermore, the data on the blockchain can’t be tampered with or deleted.
The “crypto” in “cryptocurrency” refers to the use of cryptographic algorithms that protect each transaction. Each transaction is bundled into “blocks,” and it’s connected to the blocks before, making a chain of blocks connecting all the way to the blockchain’s first block.
Each block is validated by a number of nodes, preventing any single entity from manipulating the data. The way that the transaction is agreed on depends on the consensus mechanism of the blockchain and the type of blockchain. The two most popular consensus mechanisms are Proof of Work (e.g. Bitcoin) and Proof-of-Stake (e.g. Ethereum).
Public blockchains are transparent, allowing anyone to see the history of transactions. Transparency builds trust between users, although some users can find this intrusive.
The immutability of each transaction is seen both as an advantage and disadvantage. While this makes the transactions quite secure, in case of a wrongfully executed transaction, the amount of cryptocurrency involved will be lost. Furthermore, if someone takes over your account and makes a certain transaction, you won’t be able to refund it.
Different types of blockchain and their security
There are different types of blockchains that approach security and permissions differently. They aren’t inherently more or less secure, as each of them has specific uses and advantages. The two most popular types are public and private blockchains, but we will touch on rarer types as well.
Public blockchains
As the name suggests, public blockchains can be accessed by anyone. They are permissionless and everyone with an internet and a computer can become a validator. Does this lead to a less secure environment? Not exactly.
Examples of a public blockchain are Bitcoin and Ethereum. Because they are open-source, anyone can observe code and work with other developers to improve it. Just like validation, no single entity is responsible for blockchain’s security.
Instead, communities of developers constantly work on improving the code, examining vulnerabilities, and suggesting changes. This leads to a highly secure network that’s resilient against different types of attacks.
However, a downside is that hackers and wrongdoers have insight into code as well. This means that they can also work tirelessly to find vulnerabilities they can exploit.
Private blockchains
Opposite of public blockchains, we have private ones. They are regulated more tightly, and not everyone can be a part of them. They are permissioned, and they aren’t as decentralized as the public ones.
They are also managed by a single organization. The entity that manages the private blockchain is responsible for its security. Because the network requires users to have permission to participate, private blockchains are much faster than public ones.
Only users who have proper permissions are allowed to validate transactions and make changes to the network. This type of blockchain is usually used for internal needs by organizations and companies.
Other types of blockchains
The two less common types of blockchains used are Hybrid and Consortium blockchains. They don’t have a revolutionary, radically different concept. Instead, they are both combinations of private and public blockchains.
A consortium blockchain is a network that’s managed by a number of different organizations. As they use a combination of private and public concepts, they distribute access across pre-selected nodes. Examples of this blockchain are Quorum and R3.
On the other hand, Hybrid is managed by a single business. However, they use a combination of public and private blockchains selectively. Certain data is stored in the public ledger, while only some people have private access.
Blockchain transaction monitoring
Blockchain security systems that are there by default aren’t the only way to protect your project and users. Concepts such as smart contracts and validators do great job at ensuring security, but sometimes the risks can occur from other sources.
One method of increasing security is ATO detection. This method uses third-party software that will analyze each transaction that occurs. If you supplement your platform with such software, you can protect your users from becoming victims of malicious individuals.
Transaction monitoring uses a number of factors to decide whether a transaction is fraudulent or not. This can be a transaction that involves a significant sum or a transaction frequency that’s not regular.
Hackers can obtain a user’s wallet or account from a platform in numerous ways. They can target a user through phishing attacks or hack them through other means. On the other hand, hacked accounts can be obtained on black markets.
A crypto project isn’t responsible if a user willingly loses its credentials, but it should still do what’s in their power to protect the user. Transaction monitoring is there to stop problematic activities and accounts before they are too late. But before the worst-case scenario, it’s important to implement advanced authentication and educate your users.
Blockchain transaction risks
Hackers often find cryptocurrency projects a great way to conduct scams. Malicious actions can be done in the form of creating phishing sites based on certain cryptocurrency projects.
On the other hand, crypto projects can be fraudulent themselves. Fraudsters can create a project, and once it gains traction and enough investors, they sell their tokens and abandon the project.
From the user’s perspective, they have to pay attention to the reviews of a certain project and to the individuals behind it. If there aren’t any individuals who have real experience and social media profiles, it’s likely that the project is a scam.
Companies that want to create blockchain-based projects need to make the users comfortable and follow some transparent practices to ensure trust. Besides choosing the adequate blockchain type and creating a secure website, it’s important to have strong cybersecurity protocols.
No outside dangers should be in a position to compromise your project and to do harm to either your users or the project itself.
Although one of the most important advantages of blockchain is decentralization, some degree of centralization does exist in crypto projects. The infrastructure that hosts your project needs professionals to maintain it and ensure high levels of security.
Blockchain compliance
Because blockchain is tightly connected with finance, there are a lot of regulations that companies must adhere to. In the context of blockchain security, following these regulations strictly will lead to increased security.
Failing to comply with financial regulations can lead to your company being fined or even shut down. Depending on your location, you need to adhere to local anti-money laundering (AML) laws, as well as laws in the countries where you operate.
Additional security measures such as transaction monitoring, can significantly help you with making your project more compliant altogether. There are also industry-related regulations that might apply to your project.
For example, if you’re using blockchain in healthcare, your company will also have to take care of regulations that are related to patient data and healthcare.
Protect your blockchain projects
Using blockchain to improve your business’s security is a viable option. Blockchain offers decentralized and transparent records that are difficult, almost impossible, to tamper with. However, you should always stay on top of the latest cybersecurity and blockchain trends.
With the rise of AI, there are new methods of protecting your business systems. But what’s most important is that you conduct security audits that will help you understand how your business is exposed and what aspects need additional security.
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