So, what’s a decentralized system? In simple words, we can say that a decentralized system works with no servers and each member is permissible to execute transactions. But in the case of the blockchain, each member must have to do some system-tasks as well, such as; storing transactional data.
Fork: Even a group of members can run an alternate-version of reality, which is called “fork.” The fork works by the similar regulations as the original decentralized system – though it might have a diverse state.
Let’s enlighten you about the hierarchical nature of cryptocurrency security!
First Layer – Tokens and Crypto Coins
- One of the first and foremost thing in the crypto world is your cryptocurrency security.
- Whenever you choose a cryptocurrency, you take all the perils and risks related to the protocol.
- If someone can recognize and utilize protocol flaws, they can compromise the whole network, even including you; it won’t be much important which exchange/wallet you are using.
In the first layer, you can find two different types of currencies which include, the coins (Bitcoin, Ethereum, Bitcoin Cash etc.) and all ICO-issued tokens such as; MOBI or EOS.
What is the Difference?
Well, the difference is in the technical features. Each coin is either an independent network protocol or just a copy of some of it. When you research a crypto protocol from a security stance, make sure to find out if it can be centralized.
Let’s take an example!
In the case of Bitcoin, it’s now centralized around four major mining pools which also means that if all of them collaborate, they can possibly compromise the whole network.
Another advice! Whenever you look for proof-of-stake crypto, make sure to have a look at the genesis. This is also quite imperative, as whoever keeps the preliminary and initial stake can vote for transitions, as well as the network will be also trusting those who have higher stakes. If we take an example of NEO, a PoS network of China, which is same as Ethereum, was distributed 50/50 amid its ICO sales and developer community – unlike Ethereum distribution. Also, the NEO token distribution makes sure that no major stakeholder from the exchange platform or the developing side has enough stake to compromise the whole network.
- Now if we talk about tokens, all of them are based on a smart-contract aspect of few of the coins, which means their reliability and security is first based on the parent cryptocurrency – only subsequently on the smart contract’s code that issued it.
- Mostly, all ICO coins (tokens) are based on Ethereum and just some of them are issued by smart contracts.
- Also, it is imperative to point out that Ethereum got hacked a few years ago due to the DAO protocol hack – later hard forked and rolled back to the state. This also shows that the founders of Ethereum probably have a time machine as it looks like they have the ability to go back in time – yet again if it’s required.
Second Layer – Exchanges
One thing that everyone must understand about the exchanges is that they are written in custom-code with infrastructure security and has got nothing to do with blockchain. If we talk about an exchange, it is just a standard centralized web service arrayed in a data centre. That’s why whenever we talk about the exchanges, we always mention reliability and trust.
Almost every month we hear news about the data breaches and security events that occur because of exchanges.
Here are some latest examples!
- Back in December 2017, $63 million in cryptocurrency was stolen from NiceHash by hackers.
- At the beginning of this year, January 2018, more than $500 million in cryptocurrency was stolen from Coincheck by hackers.
- In February 2018, almost $195 million in cryptocurrency was stolen from BitGrail by hackers.
The hype around cryptocurrencies is due to the number of data breaches. Many exchanges have recently started their business – without investing in proper security measures. Simultaneously, if someone steals tokens/crypto coins from an exchange successfully, it’s nearly impossible to do anything about recovering it.
Third Layer – Wallets
Well, the third layer is linked to your personal security in the crypto world and you must’ve heard a lot about it before.
When you select a wallet for cryptocurrencies, you’ll have two options:
- Hot Wallet
- Cold Wallet
Hot wallet Vs Cold Wallet
- The hot wallet is just like an account in exchange or in simple words, it is a website-based wallet.
- In the case of a hot wallet, your tokens/coins are under the control of your wallet provider.
Whereas, a cold wallet can be a hardware, software or just a paper.