Cryptocurrency, NFTs, and blockchain technology have heralded a new era of decentralization where you can be your own bank – but are the risks worth the reward?
While blockchain-based fortunes are made quickly, they can just as easily be stolen due to the high level of risk involved with decentralization. They can also be lost, as the management of access is increasingly in the hands of users. The rapidly increasing popularity of decentralization makes it more important than ever to understand both its benefits and risks.
In this article, we will help to define decentralization and how it relates to blockchain, crypto, NFTs, and more. Plus, we will provide an overview of the current risks and common hacks associated with decentralization.
Companies like Webacy are working hard to make decentralization and blockchain-based digital assets more secure for everyday consumers: this makes it easier for everyone to participate without fear.
What is Decentralization?
Decentralization is a broad term used in finance and technology to describe the elimination of a centralized controlling authority, instead favoring a distributed network where individuals hold total control over their assets and accounts.
In terms of blockchain technology, decentralization has paved the way for many blockchain-based projects, such as cryptocurrencies and NFTs (non-fungible tokens). A great example of a decentralized blockchain product is crypto wallets that are owned and operated by a single person, rather than governed by a financial institution or bank.
While blockchain is not inherently a decentralized technology – blockchain is a neutral technology that can be utilized in many different systems – decentralization is a commonly used model for enabling new transactions made with NFTs, DAOs (decentralized autonomous organizations), and more.
Why Decentralization is a Double-Edged Sword
The biggest risk involved in decentralization is the independence of individual consumers.
When you invest in decentralization – be it by purchasing an NFT, buying crypto, or opening your own digital wallet – you are on your own. It is up to each individual to decide how they will protect their accounts and assets, rather than having a traditional institution handle these challenges for them.
This is especially crucial to think about in terms of your blockchain keys used to access your wallet, NFTs, and other assets. If you lose your wallet keys or if your wallet becomes compromised by hackers – recovering your funds and assets can be near impossible without the proper support and security measures in place.
For instance, transactions made on blockchain are irreversible. Therefore, if your wallet became compromised and the cybercriminal managed to carry out a transaction, those assets would be lost to you forever.
Additionally, many software developers within the decentralization space fail to make decentralized technology beginner-friendly. You are expected to have deep knowledge of the technology – with even the most up-to-date wallets requiring users to read and comprehend the smart contracts they sign and approve.
Another layer of complexity is the multiple entry points – aka, your private keys and your recovery phrases. These keys and phrases must be kept highly secure, as having either of these can give a hacker full access to your wallet and assets. This makes everything from your internet connection and browser to your phone number a vulnerability point to keep an eye on.
The lack of regulation surrounding blockchain and decentralization also gives rise to scammers – especially when it comes to NFT and cryptocurrency projects. Let’s now take a look at some of the most prevalent scams cybercriminals are using to exploit blockchain consumers today.
The Risk of Hacks & Exploits in Decentralization
Blockchain-based hacks and exploits are running rampant as more consumers enter into decentralized systems. These hacks create a huge dent within the industry, making it appear highly unregulated and dangerous to outside observers.
For anyone new to decentralization and blockchain technology, knowing what types of risks, scams, and hacks to look out for is essential.
Here is a quick recap of the most common crimes happening in the decentralization space today:
- Hot Wallet Hacks: A hot wallet hack is used to steal digital assets and gain access to digital wallets connected to the internet by tricking you into giving up temporary approval or infinite approvals to the entry to your wallet and its assets. This is highly risky to crypto and blockchain investors, as many wallets are connected to online platforms – with the main solution being the use of a cold wallet – also called a hardware wallet – that uses a physical device rather than storing information online.
- Email Phishing: Email phishing is a type of scam where a financial criminal will pose as a trustworthy organization to get their targets to click on links within emails. Thes links can contain a variety of dangerous software that allows the hackers to gain access to the user’s wallet and assets. A major example of this is the recent $1.7 million NFT and crypto theft from Arthur Cheong, founder of DeFiance Capital, wherein hackers gained access to Cheong’s crypto wallet.
- Rugpull Scams: Rugpulls are a type of scam in which a crypto or blockchain developer will create a new project – such as an NFT or cryptocurrency – and convince investors to fund the project. The scammer will then empty the project of its funds and disappear, leaving investors with worthless investments. Recently, the operators behind the Frosties NFT $1.1 million rugpull scam were arrested – signaling a significant rise in federal and government intervention.
- Discord Phishing Links: Many NFT collections offer exclusive memberships to Discord servers – making these servers a major target for scammers. One of the largest NFT collections called the Bored Ape Yacht Club (BAYC) recently had its Discord compromised, with the hacker gaining access and posting a phishing link within the server. While this incident was handled quickly by the BAYC company, other NFT collection discord servers have not been so lucky – with the NFT collection Rare Bears reporting a similar scam that led to more than a $790,000 loss in assets.
While each of these incidents is a different security vulnerability caused by different root problems, they all share a commonality – blockchain and crypto technology. What is highlighted by these security vulnerabilities is how irreversibility of transactions can be a benefit or a major challenge for human-errors. It is clear that there is a lack of resources for preventing scams within decentralized systems.
Addressing the Risks of Decentralization & How Webacy Can Help
With the proper security measures in place, the ultimate benefit of decentralization is having total control over your own assets. No one can touch your assets or take them out of your account without your explicit approval, and your assets are often free from government meddling.
The key steps to addressing the risks of decentralization include:
- Investing in Protection Products: There are many vault products out there to choose from – including Casa, and Vault12 – that help to keep your private keys and recovery phrases safe. These tools can also help you to better manage your assets and stay up to date on any regulatory or industry changes. You may even want to consider solutions that don’t utilize a vault but simply give you a backup option on your primary wallet, including Webacy.
- Enabling Multi-Sig: Multi-sig wallets require two or more private keys to enable and approve a transaction. Not only does this secure a wallet if one private key is uncovered by hackers, it also allows for wallets to be used in group and business settings.
- Utilizing Hardware & Digital Resources: Connecting to the internet presents the biggest vulnerability to your wallet. Hardware wallets and VPN (Virtual Private Networks) are two of the best resources for protecting your wallet and assets from internet risks.
The promised land of decentralization and self-reliance is here, but it is riddled with many mines.
We need to know what we're expecting and how to protect ourselves. The future requires us to be responsible for our own safety – just as you would wear a helmet on a motorcycle, so should you put the proper safety measures in place to keep your digital assets secure.
At Webacy, our platform and products are designed to provide you with the essential security and support you need to keep your assets secure – both now and in the future. Along with offering tools to backup your wallet in the event you lose your keys, Webacy also helps you to:
- Create a crypto will
- Define your beneficiaries
- Enable a backup wallet functionality
- Set up a killswitch for emergency transfer of assets in case you’ve clicked on a suspicious link
- Safety products for all of your social media accountsTo learn more about how Webacy protects your crypto, wallet, NFTs, and other digital assets, join our waitlist today.