Despite the massive potential of cryptocurrency, there are still many who are apprehensive about getting into it mainly because of security concerns. It’s hard to blame them, though, since financial channels that cast a shadow of doubt don’t work for industry players who are looking to profit.
Perhaps many potential traders misunderstand the concept of cryptocurrency and the technology that makes it revolutionary. As we all know, cryptocurrency works through the wonders of blockchain, which is a growing list of records called blocks, and linked together through cryptography.
Security shouldn’t be much of an issue since each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. Here’s the kicker: by design, the blockchain is immutable, which means the records cannot be altered or tampered with. It’s an open distributed ledger where you can record transactions effectively in a verifiable and permanent way. Ultimately, any data recorded is resistant to modification.
While the technology was made popular with the introduction of cryptocurrency, blockchain has opened doors for processes in other industries to improve significantly. The tech’s infrastructure allows data to be stored securely, which can prove to be invaluable, particularly in the financial sector. Instead of data being stored in a central server, the blockchain stores it across vast networks of computers that always check and verify information with each other.
Blockchain technology is designed to be uncrackable. Unfortunately, there have been incidents of hacking over the past decade, showing cracks in the system.
Proof That Blockchains Aren’t Invulnerable
If a system is designed to be infallible, any successful attempt to hack into it is an instant controversy. Despite its immutability and the use of powerful cryptography, blockchain can be hacked into after finding and exploiting weaknesses in the system. Here are some of the most notable:
- In August 2010, a Bitcoin developer discovered a “value out” in a block that somehow contained 92 billion Bitcoins, which is precisely 91,979,000,000 more than what’s supposed to exist. The CVE (common vulnerability exposure) was alarmingly simple and exploited to the point of buffoonery by an unknown hacker.
- The first cryptocurrency theft happened in June 2011 when a hacker broke into the victim’s hard drive and transferred 25,000 Bitcoins, or $500,000 worth, to an external wallet.
- The record-breaking hack happened to Japanese exchange Coincheck amounting to $534 million worth of coins. A hot wallet was the culprit due to its connection to an external network instead of keeping them in cold storage or offline.
What to Know About Decentralized Digital Currencies
Cryptocurrencies are currently making waves in the financial sector, with blockchain playing a pivotal role in their security protocol and functionality. Since financial transactions are done over networks using intangible currency, a fool-proof framework must be in place.
An “unhackable” system may exist in a perfect world, but there will always be individuals who want to ruin the party by finding ways to hack into the network and exploit weaknesses in the system. To understand how hard it is to hack a blockchain, you must first understand what makes it secure.
What Makes a Blockchain Secure?
- Data Encryption
Data encryption is imperative if your objective is to strengthen security over a network, more so with blockchain. The technology ensures that your data is encrypted, making any form of modification of data a herculean task.
A cryptographic signature of a file or document can also be saved on a blockchain, giving users a way to ensure a specific file is untampered, without needing to save it on the blockchain. Since it’s decentralized, you can always check the file signatures across all ledgers on every node in the network and verify that nothing has been changed.
- Consensus Systems
In a blockchain, proof-of-work or PoW is the algorithm used to confirm transactions and produce new blocks that can then be added to the chain. The main working principles are a complicated math puzzle and a possibility to prove the solution easily. This is where the hash comes in.
A mathematical puzzle requires a lot of computational power to solve, and there are a lot of them. The answer to the PoW problem or math equation is called hash. To be part of the blockchain, the block has to go through this complex mathematical process so that it can be rendered as an immutable part of the network.
- Transaction Record Immutability
Immutability is one of the most important features of blockchain. It’s what makes it revolutionary. The way it’s designed provides an unprecedented level of trust and integrity to its users.
Each transaction verified by the blockchain network is timestamped and embedded into a “block” of information, which is cryptographically secured by a hashing process linking to and incorporating the hash of the previous block. It then joins the chain as the next consecutive update so if you wanted to alter the data in a single block, you would have to alter the data in all connected blocks in order to go unnoticed.
- Decentralized Data Storage
Due to its decentralized nature, each computer has a complete copy of the ledgers of transactions containing all the data. The absence of a single authority makes the whole system fairer and significantly more secure.
Blockchain uses innovative consensus protocols across a network of nodes to validate transactions and record data in an incorruptible manner. And since blockchain is fundamentally a ledger of information, all the data stored within must be accurate and honest. With the data saved on multiple computers across the network, it’s secure even if a couple of computers malfunction.
- Blocks of Security
As the name implies, blockchain is a chain of digital blocks that contain records of transactions. And because of its decentralized nature, they don’t have a single point of failure, with the blocks having no way of being altered from a single computer.
Each block is connected to other blocks before and after it. Hackers can break into traditional networks and find all the data in a single storage unit, exfiltrate or corrupt it, but blockchain makes this endeavor unfeasibly difficult.
Hacking a Blockchain System
- The 51% Rule
A 51% attack involves a hit on the network where an individual or organization takes control of the majority of the network mining power or hash rate. If the majority of miners are controlled by a sole entity, they would have the capability to decide which transactions are approved or not. This also allows them to prevent other transactions from happening and authorize their coins to be spent multiple times.
- Targeting Developmental Flaws
Blockchain is still relatively new, but it’s still evolving with each passing day. There are some cases where developers of blockchain applications do sloppy work, particularly in their security practices, resulting in flaws that hackers can exploit.
- Social Engineering
Fraudulent individuals can also take advantage of human behavior, specifically people who can be scammed into thinking certain social engineering methods can be trusted. They exploit people’s fear, greed, curiosity, and even their willingness to help others. Here are some of the most common:
- Phishing is done by scammers when they use emails that mimic correspondence from a legitimate company and ask for an account update or tell them it’s showing unusual activity. They typically ask for personal information that’s handed over easily.
- Scareware is designed to scare and shock users through false alarms that try to trick victims into installing fraudulent software that infects their system.
- Baiting takes advantage of inattentive users by luring victims based on their curiosity or greed, usually through free offers or access. When they sign up, they give away personal information, or their computers are instantly infective by malware that collects sensitive data.
- Selfish Miner
Also called block withholding attacker, a selfish miner is an individual in a mining pool who tries to withhold a successfully validated block from being relayed to the rest of the network. If successful, the selfish miner continues to mine the next block, resulting in having demonstrated more proof-of-work compared to other miners, allowing them to claim the block rewards.
- Eclipse Attack
Attackers isolate a user by taking control of all outgoing connections and take advantage of them through, say, carrying out a 0 confirmation double spend attack where a user is manipulated into thinking that they have received coins only to realize later that the victim has been duped into receiving nothing.
Ultimately, blockchain technology is designed to be immutable, tamper-proof, and democratic. It’s influenced by essential factors such as cryptography, decentralization, and consensus, which work together to establish a kind of security it’s well-known for.
However, being more secure doesn’t make it 100% safe. Hackers, scammers, and other fraudulent individuals will always try to exploit weaknesses in the processes outside of its fundamental infrastructure. You’ll have to be aware of the ways they could try to infiltrate and wreak havoc in the system, compromising sensitive information, and ultimately stealing from you.
Blockchain is still in its relative infancy, making it vulnerable to attacks. However, as its technology progresses, more of its weaknesses can be addressed. For now, it’s best to adopt the best practices to keep your crypto assets secure, so you can be confident that your efforts are going to be far from folks who would try to take them away from you.
Noah Project aims to use the benefits of blockchain technology to bring about social innovation and solve economic disparities across the globe. We’re committed to creating a more connected world for all through the following projects:
- Noah City is a real estate project being built in Horizon Manila, a future largest business district in the Philippines.
- Noah Coin was developed as a financial technology infrastructure to allow currencies from different nations to be exchanged freely.
- Noah Foundation is a blockchain organization whose mission is to resolve various issues that exist between countries.