7 min read
The opinions expressed by the entrepreneur's contributors are their own.
Even if the crypto industry has gained momentum, many digital currency exchanges are still vulnerable to attacks from cyber criminals. In February 2020, the Italian crypto exchange Altsbit lost digital currencies worth around $ 70,000. South Korean exchange Upbit reportedly lost around $ 51 million worth of Ethereum in November 2019. The Japanese exchange Bitpoint was also compromised, resulting in a loss of $ 30 million. In May 2019, Binance was embroiled in a high profile incident in which bad gamblers ran away with $ 40 million worth of Bitcoin.
Just recently, KuCoin released an official statement confirming the reported anomalous large withdrawals of Bitcoin (BTC) and Ethereum (ETH) tokens from the KuCoin exchange. The money has been transferred to several crypto wallets, which are listed in an updated statement from Kucoin.
The Singapore-based digital asset exchange said the cyber thieves managed to steal the private keys to their hot wallets. ERC20 tokens valued at over $ 150 million have been withdrawn. In response, KuCoin immediately transferred what was left in the compromised hot wallets to new ones and suspended all deposits and withdrawals.
Related: This Cryptocurrency Company Reduces The Volatility And Adoption Of Blockchain
The exchange of digital assets remains vulnerable
After the $ 2 billion dollar a few years ago, many expected cryptocurrency exchanges had already learned their lesson, particularly from tightening their security measures or revising their protocols. However, it appears that cyber attacks persist despite the improved defenses.
What happened to KuCoin is similar to what happened to most other thefts when exchanging cryptocurrencies. Bad gamblers could get the private keys to hot wallets and transfer the funds to their own wallets. "The hackers had the patience to wait and take well-orchestrated actions across multiple seemingly independent accounts at the most convenient time," Binance said in a statement.
If using hot wallets is the common denominator in most cryptocurrency theft cases, is getting rid of hot wallets the best solution? Unfortunately, there are still no viable alternatives to hot wallets for fast and convenient transactions. Cold wallets offer a higher level of security, but this results in higher transaction friction for users. Therefore, the exchange must fix the vulnerabilities associated with using hot wallets.
Recovery solutions implemented by exchanges
Rather than abandoning hot wallets entirely, digital asset exchanges have improved their cybersecurity systems over the years to prevent their data from being stolen. In particular, they focus on complex attacks such as social engineering and sophisticated malware.
In order not to lose the trust of their customers, some exchanges offer insurance or guarantees that the stolen digital coins will be refunded. On the one hand, Binance has a Secure Asset Fund for Users, an emergency insurance fund that covers losses in the event of cyber attacks and other unforeseen situations. In the case of KuCoin, the company promised to reimburse those who lost their money in the incident. "Please be assured that any user fund affected by this incident will be fully covered by KuCoin and our insurance fund," the company wrote in an incident update.
KuCoin’s reimbursement promise doesn't necessarily cover all of the $ 150 million worth of stolen coins. Among the 153 types of ERC20 tokens stolen were 81 million NOIA tokens. The NOIA network announced that it will issue a 1: 1 token replacement to all affected accounts.
"After hacking ~ $ 150 million at KuCoin Exchange, NOIA Network is issuing a 1: 1 (NOIA) through a new smart contract, in which new tokens are automatically distributed to all (NOIA) holders," said NOIA Network in its announcement.
Cryptocurrencies with prepared solutions for theft cases
The NOIA network has teamed up with PARSIQ to take a "snapshot" of the wallet balance on block 109446420. PARSIQ is a blockchain monitoring and automation solution with tools to detect, analyze and prevent fraud in cryptocurrency transactions. It has the technology to accurately identify wallet balances in specific cases and forensically analyze transactions in and out of the chain.
The snapshot created by PARSIQ serves as the basis for the amounts returned to the affected wallets. With this information, the NOIA network can implement a hard fork that will correctly recover the tokens stolen from the wallets of Kucoin customers and invalidate those transferred to the thief's accounts.
Related Topics: 8 Smart Ways To Analyze Crypto Tokens Before Investing
A hard fork is a process that essentially creates a new log, and therefore a new chain, independent of the original one. In the case of the above incident, the blockchain can be reset to a specific instance, whereby an invalid block in the blockchain becomes valid or an invalid one becomes valid. In the case of the NOIA network, the hard fork invalidates a block to correct the unauthorized transfer of tokens. This leads to the cancellation of the contract addresses and tokens associated with the theft. Thus, any stolen token becomes worthless and has no impact on the secondary market.
Third-party blockchain monitoring
All digital currencies that use blockchain technology can perform hard forking. However, not everyone can use it to solve a theft problem simply by forking hard. It is necessary to correctly determine the scales to be restored with a hard fork.
Using a third-party solution such as PARSIQ's “snapshot” function, tokens can be devalued by invalidating their original smart contracts and creating new contracts so that digital currency holders can claim the funds lost as a result of the theft. "In order for legitimate owners to be able to claim their assets from new smart contracts, snapshots with a total credit are required before the incident," wrote PARSIQ in an update on the KuCoin hack.
PARSIQ said it would provide snapshots not only for the NOIA network but also for other projects.
Improving security for decentralized solutions
Blockchain networks are constantly under attack because of the value of the smart contracts and transactions they contain. For one, the primary need to improve the Internet infrastructure is to improve the way platforms are managing security.
"The Internet that we have today is a patchwork of technologies that are several decades old," says Domantas Jaskunas, COO at NOIA Network. "These limitations cause downtime and downtime, which is frustrating for everyday Internet users, but which collectively causes billions in damage to large companies each year."
One way to correct this is for technology providers to build more secure layers on top of the existing Internet infrastructure.
“Prevention is always better. We believe there should be another layer of verification in every blockchain that performs an on-demand analysis of origin and destination before breaking the transaction into blocks, ”says Nobel Tan, Head of Engineering and Product at Uppsala Security. “This is technically possible, but it entails additional costs. This is similar to the development of the internet. "
Aside from improved verification and forensic analysis, the bigger picture calls for organizations to work together to address these threats.
"The exchanges need to improve their security measures as we have seen too many such violations in the past few years. Most importantly, timely cooperation is required in order to be able to take action quickly. This means immediate communication between the exchanges, the token projects and companies that offer solutions to mitigate these risks, ”says Tom Tirman, Chief Executive Officer at PARSIQ.
Take that away
Giving up hot wallets entirely will be a challenge, even if it is the most common risk factor in almost all cryptocurrency exchange thefts. There are other ways to work around the problem. Forking hard, in particular, can invalidate stolen tokens and restore lost balances in the affected wallets. However, it is necessary to use a blockchain monitoring platform such as PARSIQ and cryptocurrency exchanges (such as KuCoin) and projects (such as the NOIA network) to collaborate and implement automated solutions that provide a quick and efficient solution to theft and similar problems.