We know that blockchain, by its very nature, is the most secure data storage systеm possible. The decentralized distributed ledger technology, protected by the most advanced cryptographic methods, serves as a near-perfect repository for information and digital assets. Especially for cryptocurrency assets. 

In situations where digital assets begin to move and move outside of the core network, the security inheritance integrity of the underlying blockchain may be compromised and funds may be exposed to additional risks due to the unpredictability of potential external influences.

Interacting with decentralized finance tools when you trade on an exchange, lock your assets in stakes, participate in pharming, lending, borrowing, or any other DeFi scenario exposes your crypto assets to increased risks of theft, hacking, malware injection, and other fraudulent activities. 

Our article focuses on how to secure your investments in decentralized finance, how to protect your capital, and how to avoid DeFi scams.

Security in DeFi: How to protect your funds

The number of DeFi investors is growing, billions of dollars are locked in decentralized protocols, and that can’t help but attract attackers. Hacker groups are using increasingly massive and sophisticated methods to rob investors of their cryptocurrency savings. The situation is exacerbated by factors such as

• Technical complexity and newness. The high-tech field of cryptocurrency is a multi-dimensional field of knowledge and requires the user to have certain technical skills and a commitment to continuous self-learning. Newcomers who lack these qualities automatically become easy prey for cyber criminals and manipulators.
• Lack of effective regulation. While cryptocurrencies themselves and professional participants of the digital asset market are gradually acquiring legislative rules, the situation with DeFi is obviously much more difficult. This is primarily due to the lack of effective methods to regulate smart contacts, which are essentially software algorithms that cannot be subject to claims or demands. The lack of regulation is a significant security risk in DeFi, as it calls into question the legal protection of investor funds in decentralized applications.

Thus, being in an unformed legal environment, an investor interacting with DeFi protocols is forced to constantly improve his level of knowledge, and decentralized financial platforms are forced to develop new approaches and methods to gain a trustworthy image and user confidence. 

Risks and safeguards in DeFi projects

Decentralized finance is one of the fastest growing sectors in the cryptocurrency world. As a high-tech alternative to traditional financial systems, DeFi platforms enable fast, cheap and anonymous financial services 24/7 without intermediaries in the form of backwater banks with expensive services. Instead of intermediaries, DeFi is a decentralized protocol and smart contracts that automatically execute transactions for lending, buying/selling, providing liquidity, staking and many other forms of financial interaction between market participants.  

As such, the DeFi industry has a unique set of risks. First and foremost, they are related to the fact that you cannot go to court or the police in the event of a claim. You will not file a complaint against an algorithm. 

Among DeFi projects, there are sometimes scam projects that offer exorbitantly high entry profits based on artificial pump and dump schemes or other fraudulent combinations. However, there are many trustworthy sites on the market with a good reputation and hundreds of thousands of loyal users. Popular DeFi applications inсlude platforms such as

• Uniswap — one of the most popular decentralized crypto exchanges on Ethereum;
• Aave — a popular lending and borrowing protocol with unique industry functionality;
• Yearn.finance — a profitability improvement platform with the ability to automatically reallocate users’ investment portfolios to the most profitable farming protocols.

You have a large number of users whose funds need to be protected from unauthorized access. And of course, the developers take a variety of measures to protect against attacks on DeFi platforms. What are the most common attacks and risks to users?

Phishing and Social Engineering on DeFi

This is one of the most common methods of fraud, and one that has become alarmingly prevalent in recent years. Attackers create fake sites that mimic trusted DeFi sites and lure users there. To interact with the fake platform, users enter their personal information and/or private keys, which criminals use for authorization and to steal their assets. Developers recommend that you always carefully check the URLs that users click on. Often only a single character is changed in them.

Social engineering, which uses psychological pressure on users to find out their personal information through social networks, messengers and phone calls, requires users to be especially vigilant. Do not give in to the emotions the scammer is trying to evoke in you through manipulation techniques. Your fear, panic, greed, pity, and other emotions play into the hands of criminals who want to rob you.

Scammers use a variety of tactics to lure victims into a trap, in DeFi cases they usually offer earning opportunities after contact on social media or forums. Attackers usually pose as professionals and bombard novices with specialized terminology and clever words to impress the victim.

The most common DeFi phishing scheme involves tricking a user into connecting their wallet to a malicious decentralized application. Then, after gaining access, attackers initiate transactions in their favor and steal money.

Smart contract vulnerabilities in DeFi

No one is completely immune. DeFi projects are typically networks of smart contracts that inсlude automatic execution (closing of the contract) when certain conditions occur. This mitigates counterparty risk by automating the process, but it also increases technology risk. Smart contracts are immutable algorithms, so if an error occurs, the consequences are irreversible. This means that if funds are inadvertently sent to the wrong address (e.g., a fraudster’s address), there is no way to get them back. 

Although smart contract risk is an inherent risk of the DeFi technology itself, there are certain methods to mitigate it. 

Diligent development teams work diligently and constantly to identify bugs in protocol code and smart contracts. If attackers prove smarter or faster, they will exploit existing weaknesses in the systеm to steal funds. Regular auditing of smart contracts in DeFi projects that care about the security of user funds is a regular procedure. Independent companies that provide such services professionally are also often hired to conduct audits. 

Liquidity Risks оn DeFi Platforms

Some DeFi projects may experience liquidity problems and become more vulnerable to attacks during these periods. To avoid the risk of losing money in a project, you should always check its liquidity ratios and/or trading volumes.  

How to Choose Reliable DeFi Applications

• Choose well-known decentralized protocols with a history and a clean reputation.
• Make sure the platform team conducts regular vulnerability audits.
• Look at revenue and liquidity metrics.
• Research independent security reviews of popular DeFi protocols. Such platforms may have marketing budgets to attract users, and it is not a given that the information in the advertisements will match the recommendations of cybersecurity experts.

DeFi Security: Tips and Tricks 

• Pay special attention to private key management in DeFi.  Ensure their complete secrecy. Ideally, use cold storage devices.
• Do not neglect the use of hardware wallets in DeFi: every year they become more and more convenient for use in decentralized finance.
• When using hot wallets, make sure that the built-in security mechanisms are robust.
• Never ignore two-factor authentication. 
• Keep backups of encrypted keys in a place that no one but you knows about. 
• updаte applications regularly: they may have new security enhancements. 
• Never click on suspicious links in messages from unknown senders. 
• Keep an open mind and check out new offers. Do not fall for promises of exorbitant profits. If you are promised 3% per day, that is more than 1000% per year. It doesn’t work that way. 
• If you become a victim of fraud, disconnect your wallets from the DeFi product used by criminals, notify the relevant authorities and the platform administration about the incident. 
• Continually increase your awareness of fraud, hacking and other crimes in the market. This will help you better understand how to protect your funds from hackers on DeFi.
• Learn the best decentralized finance security practices implemented by leading cybersecurity experts. This will make it easier for you to choose the platform with the lowest risks.
• Leverage insurance tools. Funds in decentralized finance are insured through community-driven models and smart contracts. Such a systеm allows for transparent accumulation of funds, dispute resolution, and automated payouts to compensate participants for losses. 

Security perspectives in decentralized finance

In fact, the future of security in the DFI industry depends on how quickly technological innovations are introduced and whether white-hat developers are able to stay ahead of hackers. Much will depend on whose interests are served by the latest developments in artificial intelligence and quantum computing. The very nature of the sector — trusting algorithms rather than institutions — creates new vulnerabilities. And they are primarily technological.

In any case, the sector will seek to:

• Develop more secure smart contracts;
• Adopt common security standards;
• Increase automation;
• Develop proactive methods to ensure protection;
• Increase the speed of response to the threat landscape;
• Bringing together cybersecurity professionals to better protect the industry;
• Increase user awareness.

Thank you for your time. Invest safely and profitably!

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