One of the most common user concerns in crypto/web3 is the question of data and financial safety. And particularly in the DeFi sector, security is the biggest concern, influencing users' decisions to utilise a platform or not. During the week, the importance of security was highlighted once again, as Delta Prime, a DeFi trading and staking platform, suffered a hack, leading to a loss of >$6M for the platform and its users.
The occurrence of such mishaps underlines the need for strengthening security protocols and practices in the DeFi sector, and in our article today, we shall be covering the need for high security standards, such as smart-contract security practice, security monitoring and incident response, and other security measures to help enhance users trust in safe platforms.
Delta Prime’s misfortune began after it lost control of a wallet address. But this just wasn’t any wallet address. It was an admin wallet address that controls proxy contracts used for storing liquidity. And upon loss of that wallet, the hackers were able to gain access to these pools, draining the liquidity in them for ETH on an external wallet. Initially a $3.5M loss, Delta Prime did not have reliable security practices to curtail loss at quick impact. This was why the hackers were able to siphon more money from the platform, resulting in a ~$6M loss to the company.
Losing control of admin wallets or experiencing private key exploits can lead to severe risks in cryptocurrency and blockchain-based systems. The most immediate danger is unauthorised access and theft, where attackers gain control of funds and assets, often with irreversible transactions, resulting in significant financial losses. Additionally, admin wallets typically have elevated privileges, allowing attackers to manipulate the system’s core functions, such as smart contracts or governance protocols, potentially destabilising the entire network or ecosystem.
Beyond financial and operational threats, losing control of admin wallets also leads to reputation damage and trust erosion. Customers, investors, and users may lose confidence in the platform’s security, leading to decreased engagement and investment. This erosion of trust can have long-lasting financial implications, further harming the platform’s market standing. Therefore, implementing strong security measures like multi-signature wallets and regular audits is essential to mitigate these risks.
Rigorous smart contract auditing and regular security assessments are essential to the security of blockchain systems and decentralised applications (dApps). A Chainalysis study found that $3.8 billion worth of cryptocurrency was stolen in 2022, with a significant portion due to vulnerabilities in smart contracts. Since smart contracts are immutable once deployed, any bugs or security flaws cannot be corrected post-launch, making thorough audits a necessity. These audits ensure the contract functions as intended and cannot be exploited by malicious actors. Furthermore, regular security assessments help identify new vulnerabilities as systems evolve with updates or new features. Without these protective measures, organisations face significant financial losses and reputational damage if hackers exploit flaws.
In addition to regular audits, integrating automated security tools can enhance security by detecting vulnerabilities early in the development process. According to a 2023 survey by CertiK, 65% of blockchain vulnerabilities in the past year could have been mitigated with better automated tools. Mythril and Slither, for example, are static analysis tools that scan smart contract code for common vulnerabilities like re-entrancy or overflow issues. Meanwhile, tools such as Truffle or Hardhat provide automated testing frameworks that simulate various conditions to ensure contracts behave securely. By incorporating these tools into continuous integration (CI) pipelines, organisations can automatically scan for security flaws with every code update. This automated layer of defence ensures vulnerabilities are flagged and fixed before making it into production, significantly reducing risks.
Implementing bug bounty programs adds another critical layer of security by incentivizing ethical hackers to identify and report vulnerabilities before they are exploited. Platforms like HackerOne or Immunefi facilitate these programs, and according to Immunefi’s 2023 report, over $52 million has been paid out to ethical hackers since its launch, helping to prevent potentially catastrophic breaches. Bug bounty programs provide access to a global network of security experts who can uncover hidden vulnerabilities that may go undetected by internal teams. To ensure the program's success, organisations must clearly define the scope, specifying which systems are in focus, and offer fair rewards based on the severity of discovered bugs. Such programs not only enhance security but also foster a proactive approach to finding and mitigating risks before malicious actors exploit them.
By combining rigorous auditing, automated security tools, and bug bounty programs, organisations can create a multi-layered security framework. This approach proactively detects and addresses vulnerabilities in smart contracts, helping to avoid the growing threat of cyberattacks. Given that 43% of blockchain hacks are caused by smart contract flaws, these measures are vital to reducing the risk of hacks, financial losses, and reputational damage while enhancing the overall resilience of blockchain platforms.
The risks of centralised wallet control defeats the principle of decentralisation itself. Centralised control over administrative wallets pose a single point of failure, as if a hacker gains access to a centrally controlled admin wallet or its private keys, they could manipulate or drain funds from the entire platform, leading to massive financial losses. To mitigate these risks, DeFi builders must prioritise designing more secure and decentralised administrative systems, to achieve independence for each wallet and its operations.
One of the primary ways to achieve this is by implementing multi-signature wallets, which requires multiple parties to approve transactions before they can be executed. This ensures that no single individual has complete control over the system, significantly reducing the chances of funds being compromised in the event of a security breach. Another approach is using decentralised governance frameworks where key protocol decisions and administrative functions are distributed among a group of stakeholders rather than centralised in one wallet or entity. This not only increases security but also aligns with the principles of decentralisation that DeFi is built upon.
In addition to multi-signature wallets, decentralised key management systems are increasingly being adopted to further enhance security. These systems distribute the responsibility of managing private keys across multiple parties or nodes, making it incredibly difficult for any one party to compromise the wallet. Solutions like Threshold Signatures or Shamir's Secret Sharing split the private key into several pieces, only allowing access to the funds when a certain number of pieces are combined. This approach adds an extra layer of protection, especially in cases of targeted attacks or internal collusion.
Setting up rapid-response protocols is essential for DeFi platforms and organisations handling digital assets to mitigate damage in the event of an attack. And in blockchain, the ability to react quickly can mean the difference between limiting the scope of a breach and suffering catastrophic losses. A well-coordinated response involves technical measures, communication strategies, and proactive monitoring.
The first step in a rapid-response protocol is establishing a crisis management team. This team should have predefined roles, responsible for investigating breaches, halting suspicious transactions, and communicating with relevant stakeholders. This team also needs clear escalation paths so decisions can be made swiftly. A critical part of their response protocol is the communication strategy. Users should be promptly notified of the attack through various channels, including email, social media, and the platform’s in-app notifications. Additionally, a dedicated support group should be on standby, addressing user concerns and providing instructions on safety through such situations.
In addition to response teams and communication strategies, having real-time monitoring systems in place is vital for early detection of suspicious activity. These systems can provide valuable minutes or hours of warning before a full-scale breach occurs. By continuously analysing on-chain data and user activity, real-time monitoring tools can detect anomalies such as sudden large withdrawals, abnormal transaction patterns, or unauthorised access to admin wallets. Platforms like Chainalysis, Covalent, or OpenZeppelin Defender offer tools that continuously scan for unusual behaviour, alerting the security team to take immediate action. This early detection allows for quicker incident response, reducing the potential for large-scale damage.
Centralised wallet control in DeFi systems creates a single point of failure that exposes platforms to significant financial and security risks. Hence, by implementing multi-signature wallets, and leveraging decentralised key management systems, DeFi builders can design more secure, decentralised administrative structures that mitigate these risks. These best practices not only protect admin wallets and private keys but also strengthen the integrity of the DeFi ecosystem by reducing the chances of catastrophic losses due to security breaches.
Albeit, in cases where compromise occurs, it is crucial to have rapid-response protocols for minimising the damage of any attack. From early detection to transparent information, organisations need to adopt quick reaction plans to ensure the situation doesn’t worsen. By integrating these elements and practices, organisations can significantly mitigate the impact of an attack, preserving both financial and reputational integrity.
