How can a Decentralized Exchange Prevent Hacking?
DeFi has been such a fast-developing sector of crypto space that the growth has surprised everyone. DeFi users are still trying to wrap their heads around how DeFi protocols have treaded beyond decentralized crypto-exchange software development and have opened doors to traditional financial products and multiple yield farming opportunities. While DeFi provides great money-making opportunities, the DeFi protocols have also become prone to hacks. Some of the high-profile attacks of 2020 were the dForce protocol attack worth $25 million, the Harvest attack worth $24 million, and more.
Before we find out how these hacks can be prevented, let us first look at the classification of hacks.
What kind of hacks can a Decentralized crypto exchange or a DeFi protocol face?
Interestingly, no two DeFi hacks look similar. However, based on the soft spots, we have categorized the hacks:
- Smart Contract Code Exploits
Unlike centralized exchanges, Decentralized exchanges (DEXs) take a different approach to facilitate buying and selling of crypto. When you buy crypto exchange software for running a DEX, it is clear that the exchange will be using self-executing smart contracts to conduct the trades.
However, the crypto exchange development companies must make sure the smart contracts are well audited. Some of the most common attacks that could happen due to coding mistakes are reentrancy on a single function, reentrancy on cross-function, and more. As smart contracts in DEXs handle the assets, any exploit could lead to the potential loss of assets.
Thus, the internal and external smart contract security audit is of paramount importance. Even when you plan to buy bitcoin trading software, make sure the software is well tested and audited.
- Smart Contract Logic Exploits
Due to the lack of development experience, smart contracts might not be designed in a way that covers all the conditions. For example, what happened with the Harvest Protocol is a perfect example of a smart contract logic exploits. Basically, the effects of impermanent loss of USDC and USDT inside a pool were exploited. This means the smart contract logic was not well thought through.
Apart from these, the other types of hacks are when you lose your private key or someone gets access to it.
How can you prevent such kinds of hacks?
To improve the security of a DeFi project, protocol, or a DEX, one must ensure that the following things are taken care of:
- 100% Test coverage
Detecting a functionality issue or a design flaw is possible only by conducting a 100% test coverage of every piece of code. Thus, not only the smart contracts but the end-to-end code of the protocol or project must be tested.
- Smart Contract External and Internal Audits
Even the 100% test coverage is not enough to ensure the complete security of the projects. Thus, always purchase crypto exchange software that has been through internal and external audits.
Many reputed audit organizations conduct extensive tests on the code to ensure it is impenetrable as they test the code against all possible scenarios.
- Use multi-sig
Make sure your protocol is protected by multiple signatures. This ensures if the hacker gains access to one private key, he cannot access the asset pool. There are two ways to handle it.
The first one requires a separate multisig contract and the second one is to develop a multisig logic within the DeFi protocol.
- Bug Bounty programs
Another way to identify the soft spots in the code is to ask your community to do so by running bug bounty programs. While this builds the trust of your audience in your exchange or DeFi protocol, it works well to identify the security risks.
CONCLUSION
Decentralized exchanges are one of the most powerful tools of the crypto ecosystem which makes it a very attractive product for investment. However, one must not ignore the fact that just like while you buy Bitcoin trading software you make sure it is well tested, you must make sure the decentralized crypto exchange software you are about to buy is not vulnerable to hacks.
At Brugu, we build decentralized exchange platforms fortified with institutional-grade security. Our blockchain engineers emphasize achieving the highest security standards alongside market-leading features to achieve world-class performance.
What is Decentralized Cryptocurrency Exchange?A decentralized exchange (DEX) is a partially-automated cryptocurrency exchange platform where no intermediate third-party can hold customers’ personal information, account balances, portfolio allocations, and fund positions at any stage.
A decentralized exchange is popular for trading any cryptocurrencies without the restrictions of centralized platforms.
however once they have done creating an account they can list cryptocurrencies to sell, or buy someone else's, almost immediately.The most common Decentralized exchange typically rely on a blockchain platform.
The blockchain community understands the risks involved in trading cryptocurrencies and creates a better trading experience with Decentralized Exchanges.
The main idea here is that traders can remain the custody of their funds.Wandering to build your DEX Platform?Before developing your DEX platform, look into the below key features...Trade Engine:Trade engine is the basis of any cryptocurrency exchange that collects all the information to match the perfect orders to find counterparties.To create a trading engine, you need to understanding of blockchain technology as well as immersed programming skills, which takes long time and expense.
But here you can save if you use open-source software, which will be of high quality and reliable.Atomic Swap:An atomic swap is a kind of peer to peer exchanges that works on blockchain, uses lightning network so the transaction fees for such operations are very low.
Decentralized ExchangeDecentralized exchange is the best platform for start your exchange business.
This exchange gives a trust for the traders to trade their cryptocurrencies.
Compared to the centralized exchange, the trading process is faster in the decentralized exchange.In the Decentralized exchange platform, there is no middleman and no centralized control between the buyer and the seller.
The transactions in the decentralized platform is more secure and confidential.Benefits of a Decentralized ExchangeLow trading fees:Decentralized exchanges have very low operating overheads, which helps them to maintain their trading costs.
But still, DEX’s rates are quite manageable compared to the centralized exchanges.Enhanced Security:In a decentralized exchange, users do not hand over the assets to a third party.
Here blockchain technology is used to add security features.No middleman:There is no participation of third parties in the decentralized exchange platform.
