Cryptocurrency has major security issues.
Unlike fiat currency—the kind of money most people use every day—cryptocurrency isn’t regulated by a government, and it’s not insured by a banking system, so investors don’t have the same protections against things like theft and Ponzi schemes.
Blockchain technology helps solve this problem. While blockchain does not keep cryptocurrency investors completely safe from loss and fraud (opens in a new tab)it tracks and verifies information about crypto transactions, including who has rightful ownership of a token.
What exactly is blockchain?
Blockchain is a virtual ledger that stores information about cryptocurrency (opens in a new tab) transactions.
To break it down further, the “block” in blockchain refers to a unit of information added to the ledger. A single block can contain all kinds of information, but it usually includes the following details about cryptocurrency or NFT transactions:
- Sender and receiver
- Date and time of the transaction
- The amount and type of asset
Each block in the blockchain also has a unique identifier, called a “hash,” which is a long string of characters that acts like a digital pin or fingerprint.
When a new block is created, it contains the previous block’s hash, therefore forming an end-to-end “chain” of traceable transactions.
Is blockchain the same as bitcoin?
Blockchain was invented to be used with Bitcoin, but they are not the same.
Bitcoin (opens in a new tab) is a type of cryptocurrency and it was the first crypto to be invented and is still the most widely circulated virtual coin.
Although blockchain was created to track Bitcoin transactions, the technology is now used by most cryptocurrencies, including Ethereum, Cardano, and Litecoin, and is even used by some businesses to track non-digital transactions.
How secure is blockchain?
Blockchain provides security for cryptocurrency transactions, but it does not always protect investors from losses. From flash loans to crypto payment scams and malware that steals account credentials (opens in a new tab)threats abound.
According to a report (opens in a new tab) from blockchain data platform Chainalysis, $7.8 billion worth of cryptocurrency was stolen from individuals in 2021. Crypto security – or the lack thereof – has also made some big headlines in 2022:
- In May, celebrity NFT promoter Seth Green had more than $300,000 (opens in a new tab) worth of NFTs stolen from his crypto wallet in a phishing scam.
- Investors lost tens of billions (opens in a new tab) of dollars during the scheme stablecoins, luna and terraUSD, in May.
- Between April and July, three large quick loan schemes took place, the third of which cost Nirvana Finance $3.5 million (opens in a new tab).
- In August, the creators of Forsage were charged with embezzling $300 million (opens in a new tab) from investors in a bogus crypto-Ponzi scheme involving blockchain contracts.
How blockchain helps
What blockchain effectively does is create a record that is highly accurate and almost impossible to change. Because of the transparency and credibility of blockchain records, US law enforcement has repeatedly been able to use the ledgers to track down criminals, and even return stolen digital assets to their rightful owners.
Each blockchain uses a slightly different process, but these are some of the ways blockchain ensures security:
Confirming information
Creating new blocks requires a significant amount of work.
The work is usually done by “miners”, or people who use specialized hardware (and a huge amount of computing power) to verify information based on a predetermined set of rules.
Before a new block can be added to the chain, it must be validated by a majority of other users, or “nodes”, in the network. As of January 2021, there were an estimated 83,000 nodes in the Bitcoin network.
Protects information
Once a new block is added to the chain, it is extremely difficult to change.
To effectively tamper with a single block in the chain, a bad actor would have to change the hash of multiple blocks. Then most people in the blockchain network must accept the changes as valid. If the changes are not accepted, all subsequent blocks become invalid.
How can you keep your cryptocurrency safe?
Arguably, the biggest threat to crypto security is user error.
Many losses are not the result of blockchain hacks, but rather consumers practicing poor cybersecurity habits and failing to recognize fraud.
Investors should follow these best practices to avoid losing money:
- Watch out for “carpet covers”. Just because a cryptocurrency is listed on an exchange does not mean it is legitimate. Be wary of fake coins that look like names, and only buy cryptocurrencies that have undergone code audits.
- Protect your key. Private keys prove ownership of crypto. You can store your keys online, but it’s safer to keep them offline in a “cold wallet” such as a USB drive, written down or locked in a safe.
- Get insured. Check if a crypto exchange protects against criminal losses before making a purchase.
- Click wisely. Never click on an ad on social media or use a link from a post or private message to buy cryptocurrency.
Other good cyber security practices (opens in a new tab) are also important. Like any other consumer, crypto investors should always use strong and unique account passwords, automatically install new updates on their devices, and limit their activities while using public WiFi.
