Cryptocurrency has significant security issues.
Unlike fiat currency, the type of money most people use every day, cryptocurrency is not regulated by a government and is not insured by a banking system, so investors do not have the same protections against it. things like theft and Ponzi schemes.
Blockchain technology helps solve this problem. While blockchain does not keep cryptocurrency investors completely safe from losses and scams (opens in a new tab)tracks and verifies information about crypto transactions, including who has rightful ownership of a token.
What exactly is the blockchain?
Blockchain is a virtual ledger that stores information about cryptocurrency (opens in a new tab) proceedings.
To break it down further, “block” in blockchain refers to a unit of information that has been added to the ledger. A single block can contain all kinds of information, but usually includes the following details about cryptocurrencies or NFT transactions:
- The sender and the receiver
- The date and time of the transaction.
- The amount and type of asset
Each block in the blockchain also has a unique identifier, called a “hash”, which is a long series of characters that acts like a digital pin or fingerprint.
When a new block is created, it contains the hash of the previous block, thus forming an end-to-end “chain” of traceable transactions.
Is blockchain the same as bitcoin?
Blockchain was invented to be used with Bitcoin, but they are not the same thing.
Bitcoin (opens in a new tab) is a type of cryptocurrency, and was the first crypto ever invented and is still the most widely circulated virtual currency.
Although the blockchain was created to track Bitcoin transactions, now most cryptocurrencies, including Ethereum, Cardano, and Litecoin, use the technology, and some companies even use it to track non-digital transactions.
How secure is the blockchain?
Blockchain provides security for cryptocurrency transactions, but it does not always protect investors from loss. From quick loans to crypto payment scams and malware that steal account login credentials (opens in a new tab)threats abound.
according to a report (opens in a new tab) from blockchain data platform Chainalysis, $7.8 billion worth of cryptocurrency was stolen from individuals in 2021. Cryptosecurity, or lack thereof, has also made headlines in 2022:
- In May, famed NFT promoter Seth Green had over $300,000 (opens in a new tab) worth of NFTs stolen from your crypto wallet in a phishing scam.
- investors lost tens of billions (opens in a new tab) dollars in a run on stablecoins, luna and terraUSD, in May.
- Between April and July, three major flash loan schemes were carried out, the third of which cost Nirvana Finance $3.5 million (opens in a new tab).
- In August, the creators of Forsage were accused of taking over $300 million (opens in a new tab) of investors in a fraudulent crypto Ponzi scheme involving blockchain contracts.
How Blockchain Helps
What blockchain does effectively is create a record that is highly accurate and almost impossible to modify. Due to the transparency and credibility of blockchain records, US law enforcement has been able to repeatedly use ledgers to track down criminals and even return stolen digital assets to their rightful owners.
Each blockchain uses a slightly different process, but here are some of the ways the blockchain ensures security:
verifying information
Creating new blocks requires a significant amount of work.
The work is usually done by “miners,” or people who use specialized hardware (and a large amount of computing power) to verify information based on a predetermined set of rules.
Before a new block can be added to the chain, it must be validated by a majority of the other users, or “nodes,” on the network. As of January 2021, there were an estimated 83,000 nodes on the Bitcoin network.
information protection
Once a new block is added to the chain, it is extremely difficult to modify it.
To effectively manipulate any individual block on the chain, a bad actor would have to alter the hashes for multiple blocks. So the majority of people on the blockchain network would have to accept the changes as valid. If the changes are not accepted, all successive blocks become invalid.
How can you keep your cryptocurrency safe?
Arguably the biggest threat to cryptographic security is user error.
Many losses are not the result of blockchain hacks, but consumers practicing bad cybersecurity habits and failing to recognize scams.
Investors should follow these best practices to avoid losing money:
- Watch out for “carpet pulls.” Just because a cryptocurrency is listed on an exchange does not mean it is legitimate. Beware of counterfeit coins with similar names and only buy cryptocurrencies that have undergone code audits.
- protect your key. Private keys prove ownership of cryptocurrencies. You can store your keys online, but keeping them offline in a “cold wallet” like a USB drive, written down or kept in a safe is more secure.
- be insured. Check if a crypto exchange protects against criminal losses before making a purchase.
- Click wisely. Never click on a social media ad or use a link from a post or private message to buy cryptocurrency.
Other good cybersecurity practices (opens in a new tab) they are important too. Just like any other consumer, crypto investors should always use strong and unique account passwords, automatically install new updates on their devices, and limit their activities while using public WiFi.
