How important is security in the modern world? It is crucial, especially when it comes to finances, no matter the form.
As the novelty of crypto assets starts wearing off, the security aspect of these instruments becomes a focal point. After all, no one wants to lose their assets to theft or fraud.
These are the main reasons why secure tokens gained popularity amongst newcomers and seasoned professionals in the crypto space. My name is Dima Dimenko, I am the co-founder of the 111PG project. And we help tokens become safer. Our main task is to protect tokens during listing on DEX exchanges. But besides that, we try to work a lot on the general education of the market about this important problem - hackers and hacks. Let's go!
The importance of cybersecurity in DEX exchanges
Decentralized exchanges (DEXs) remain an essential part of the cryptocurrency system. Their core function is to facilitate the exchange (duh!) of crypto, instantly and with no intermediaries in between. Most large DEX exchanges have their own control and management systems. For example, Uniswap, Waves, or dYdX. However, some DEX exchanges may not have controlling bodies. Once you commit to a trade, you delegate control over your transaction to a smart contract. This bears extra security risks stemming from the potential lack of responsibility allocated to a single entity.
Thus, when we assess the cybersecurity of DEX exchanges, we can outline three main approaches: security audit, bug bounty program, and the exchange website configuration from the standpoint of SSL/TLS use.
Security Audits
While DEX exchanges rely on smart contracts, they represent a vulnerability to hacks and other types of attacks. In this regard, ensuring the security of a smart contract becomes the first priority. Security audits and a penetration test are critical for ensuring the security of a smart contract. Specifically, an experienced cybersecurity team investigates smart contracts and other parts of the protocol code for potential vulnerabilities. While such an approach does not guarantee full-proof security, it lowers the vulnerability of the attack significantly.
The characteristics of a security audit allow us to evaluate its quality and the security of a smart contract. These characteristics include audit scope, audit regularity, and audit-driven changes. The audit scope should extend beyond the analysis of the smart contract code by assessing the execution process. Audit regularity entails its sufficient frequency for identifying new vulnerabilities amid code changes. Audits should lead to meaningful changes entailing security improvements.
Bug bounty program
Bug bounty programs offer additional incentives for ethical hackers to seek and determine vulnerabilities within the platform. DEX exchanges reward the hackers that find and report vulnerabilities. The ability to prevent financial losses using bug bounty programs represents the fundamental value of these programs to DEX exchanges and their participants.
However, we believe that this is an important process in general for the development of the market, but it is difficult to call it «protective».
Sure, it helps companies identify weaknesses in their defenses, but hacker progress often outpaces defensive abilities. And here we need to develop the cybersecurity industry as a whole, rather than just resorting to one-off actions.
Configuration for SSL/TLS
The use of SSL/TLS is one of the best practices for DEX exchanges. Specifically, the SSL/TLS enables authentication, integrity, and confidentiality protection. These tools prevent data theft and transfer by third parties. The combination of the mentioned features contributes to the security of DEXs and crypto assets within these exchanges.
SSL consists of two phases: the handshake phase and the data transfer phase. During the handshake phase, the client and server use public key encryption to determine the parameters of the secret key used by the client and server for encryption during the data transfer phase.
The client initiates the handshake by sending a "hello" message to the server. This message contains a list of symmetric encryption algorithms (cipher specs) supported by the client. The server responds with a similar "hello" message, choosing the most suitable cipher specs from the list. The server then sends a certificate that contains its public key.
The certificate is a set of data that verifies authenticity. A validated third party, known as a certificate authority (CA), generates the certificate and verifies its authenticity. To obtain a certificate, the server must use secure channels to send its public key to the certificate authority.
Types of attacks that can happen
- Sniping Bots
The failure to ensure sufficient security of a token may lead to millions or even billions worth of U.S. dollars in crypto.
The main goal of a sniping bot is to get into Block 1 during the addition of liquidity to the pool. The number of bots may reach hundreds during the launch to overwhelm the security systems. As the users are unable to enter the Block, bots gain an unfair advantage to inflate the price. The bots usually dump tokens in a short term to the users observing its price increase. After the dump, the prices of tokens fall dramatically causing massive financial losses.
The companies use anti-sniping bots and other methods to prevent this. Specialized platforms, such as 111PG, can deny or revert sniping bot transactions. But developers of anti-sniping bots avoid making them open-source with the purpose of protecting the code behind the solution. Such an approach ensures fair listings without damage to the community or the token issuer.
- Front-running bots
Another common type of attack is the use of front-running bots.
Front-running bots are more sophisticated than sniping bots. They manipulate the order of transactions within a block paying higher gas prices. The exchange places them first in the queue for processing their transactions. The main reason is the inherent complexity of algorithms. The timing of the operations is also shorter.
The inherent complexity of these bots stems from the level of automation. It allows for determining the optimal transaction size in a millisecond. Since information is available on a digital ledger front running is legal. At the same time, the activity is illegal in the financial markets. Thus, it is up to the projects undergoing IDOs to improve security and protection. The measures should focus on the front-running bots.
Reputation is what’s at stake
It is difficult to overestimate the importance of reputation for token issuers. The
A lesson learned: it is never a good idea to cut costs on security. The eventual losses from the successful attack may depreciate the value of the project and its future attempts to raise funding.
Why secure tokens are more successful than the insecure ones
By secure tokens, we mean those that have received protection during placement on the DEX exchange. Because it is the listing process that is the most dangerous for developers.
First, as we described above, protected tokens will be entirely under your control. Even if bots hit block 1, they won't be able to get their hands on them. In our personal last case, when we provided services to the MOON project, we managed to protect almost $40,000 worth of tokens.
That is, if your tokens are protected, then the probability of losing the invested effort, money, and time is reduced to almost zero.
Another important part, also described, is reputation. Just one bot attack can forever destroy the entire community around your project. Putting your career as a CEO or simple developer in question.
And if we talk about the main reason why secure tokens are better than unprotected tokens, we can put it this way:
Protected tokens give you the ability to sleep easy and not worry that things will go very badly during an IDO. And instead of celebrating the official release of the coin, you get a hard experience.
Secure tokens reflect the ability of a particular project to develop and implement a reliable solution. In this context, secure tokens offer an additional level of trust between the community and the project owners. Moreover, they speed up the legal adoption of crypto assets – a so-called institutionalization, – since security is a guarantee for a just and free market. Hence, more people will feel comfortable getting involved.
Security tokens create a healthy ecosystem while maintaining proper liquidity. Each token serves as a project’s representation. This transforms into a long-term relationship between the users and the issuer.