Security protocols of cryptocurrencies


The meteoric rise in popularity of cryptocurrencies in recent times has led to people owning higher amounts of digital currencies for personal consumption or trade. However, this can lead to opportunities for hackers who are looking to compromise the security of the crypto or its storage for personal profit. The security of cryptocurrency storage devices (or the lack of it) is a key factor behind an individual’s investment in cryptos and hence, it makes sense to look deeper into various security layers and precautions to be followed by the holder of the digital currency.

Three Layer Model

How do we start securing our crypto holdings? This question can be answered in a variety of ways; however, the basic fact remains that there should be a multi-layer framework in place to ensure robust security of digital assets. An overview of the layers is provided as follows: –

Coins and Tokens

tokens and coins

Identifying and selecting the correct cryptocurrency is an important first step towards safe crypto storage. If the crypto protocol has serious security flaws which can be exploited by hackers, the entire network is likely to be compromised, irrespective of the choice of crypto exchange or wallet. At this layer, there are two different sub-layers as follows: –

  • The coins themselves e.g., Bitcoin, Ethereum etc.
  • The ICO-issued tokens e.g., EOS, MOBI etc.

While researching a cryptocurrency protocol, a starting point can be to check if it can be centralized. For instance, Bitcoin is centralized around four of the largest mining pools, and these pools can potentially compromise the network.

The tokens are based on a smart-contract feature of some coins and hence, the security is based firstly on the parent cryptocurrency and subsequently on the code of the smart contract that issued it. As all ICO coins are based on Ethereum (a few like MOBI are issued by Stellar), if Ethereum’s security gets compromised it will have a cascading effect on the security of the tokens.

Crypto Exchanges

crypto exchange

The second security layer is cryptocurrency exchange, which is effectively a classic centralized web service deployed in a cloud or data centre. The infrastructure security of crypto exchanges is not related to blockchain, thus making it vulnerable for security-related incidents and data breaches. For instance, there were high value security incidents in the previous 3-4 years on exchanges like NiceHash and Coincheck.

It can be observed that, with the ever-increasing hype around cryptocurrencies, there is a greater demand for exchanges to trade cryptos. To meet this demand, businesses set up crypto exchanges without implementing proper safeguards and, this can lead to security incidents as mentioned above. Also, due to lack of regulation around digital currencies, there is very little recourse available in case of theft of coins or tokens from an exchange.

Crypto Wallets

crypto wallet

Individual crypto security is the layer where an individual has a greater level of responsibility for his holdings. Wallets can be of two types – hot and cold – and it is necessary to research the security protocols implemented for those wallets. For instance, a cold wallet may have a public – private key requirement to fund or redeem digital currencies, however the process of key pair creation needs to be analysed for any security shortcomings. Hot wallets are connected to the internet and hence, are more susceptible to security lapses, especially since they are frequently outside the remit of a blockchain system.

Apart from the above, secure storage of keys and crypto wallet collectibles is essential to ensure the safety of cryptocurrencies. Common means of ensuring crypto security are encryption, secret sharing, physical locks etc. The backup security features should also be protected against external risks. An ongoing assessment of the crypto infrastructure helps to identify risks and control deficiencies in the security set-up; this is a dynamic way of safeguarding cryptocurrencies.

Closing Words

conclude - Security protocols of cryptocurrencies

It is still young days for cryptocurrency and blockchain technology; however, as observed, security is one feature which cannot be compromised if digital currency is to grow exponentially going forwards. The good news is that the security infrastructure for cryptocurrencies is still evolving and it is hoped that previous mistakes will not be repeated in the quest to make the cryptocurrency ecosystem 100% safe. Just as “unbreakable” security vaults were designed to guard against safecrackers, digital asset holdings are in virtual safes and these need to be equally strong in resisting external attacks!