Decentralisation and direct participation through tokenisation have seen a rise in community projects and DAOs (Decentralised Autonomous Organisations). The main appeal of tokenisation (in this context) is governance, utility, or community asset tokens, which is why engagement is at an all-time high. Although these projects come with an array of benefits for users, their non-traditional, often rapidly deployed nature has given way to a unique set of cybersecurity risks. While there are a few key risk vectors users need to be on the lookout for, there are also some great mitigation strategies to follow to combat them.
Best Practices for Wallet Interaction and Verification
Financial loss is the bane of all investors’ existence. This further emphasises the importance of segregating traditional finances from your crypto or decentralised interactions. A secure wallet will be a lifesaver in the event of a malicious link or website, or if data is intercepted by a malicious third party. When using a fiat payment method (debit or credit card) with a new or unverified project, users risk exposing their sensitive information to centralised hacks. Crypto wallets offer a crucial layer of abstraction when engaging with digital asset platforms, standing as a user’s first line of defence.
For example, the Space XRP Official Website provides interested users a gamified way to stay updated on tokenomics, staking, and crypto presales. Users who actively contribute to projects can accumulate tokens through live presales and can pick up special NFT drops. Of course, this means financial transactions will be a regular occurrence on these sites, so using a crypto or digital wallet is best to protect your sensitive information. Even if it is a transaction as simple as paying for food on Uber Eats or moving around your digital assets, leveraging dedicated crypto wallets is vital to avoid falling victim to malicious third parties.
Smart Contract Vulnerabilities: Code is Law (Until It Isn’t)
The immutability of code is the core of blockchain risk, as bugs function as permanent exploits for potential cyber attackers. To combat this, a pause function or upgrade mechanism will need to be implemented, which can prove complicated and exhaustive for an already existing smart contract. As such, these bugs leave users open to an array of risk vectors, such as re-entrancy attacks, which have malicious ordering occurring within a smart contract function. In essence, an attacker will execute an external call to the victim contract (such as a withdrawal execution).
If the victim has sufficient funds, it will be drained by the third party before the user’s balance (or state) can be updated. From here, it is rinse and repeat, and the loop continues until all the funds are gone. Some bugs may lead to access control flaws, where unauthorised, external parties are allowed to perform unintended privileged actions. Unchecked external calls are also an issue, as unexpected outcomes can occur should an unvalidated contract interact with another. As such, strict professional audits done by humans are a necessity. Logic bugs exist, as well, and can result in a good audit code overlooking if a specification was flawed.
Governance Token Risks: The DAO Dilemma
DAOs also present a unique risk related to how tokens provide users with voting power in these communities. The core appeal of decentralisation is the lack of an institution or singular entity being in control of user funds. Easily, this “control” can be stripped away by the presence of large token whales, who, naturally, will have more say over proposals and treasury spending than the average user. Although all malicious attacks are bad, targeting user governance is the worst. If an attacker were to use flash loans or the accumulation of small holdings to quickly gain tokens, they could gain control over a DAO.
There is no way to stop them from passing a malicious proposal that could grant them admin keys or even drain the community treasury. As such, crucial counter-measures are needed. Preventing hostile takeovers would need to see the presence of quorum requirements, which would demand the presence of validators to agree on whether a transaction is legitimate. Governance timeouts (a time limit on decision-making processes) and vesting schedules (which can prevent large token dumps) are also good mitigation options.
Oracle Manipulation and External Dependencies
As much as tokens offer users decentralisation, they still need to interact with real-world data for price feeds or external events. Generally, this is done through Oracle, which is an entity that connects blockchain with external systems for this information. It can be argued that while the contract itself is secure, its reliance on a centralised data feed could end up being its Achilles’ heel. Simply put, it can serve as a vulnerability for malicious attacks. If a third party were to intercept this connection, they could potentially feed false information into the DeFi lending mechanism.
Let’s say they provide an incorrect low price; with the token now being used as collateral, the user could borrow massive amounts of crypto before the error is even spotted. Instead of relying on external systems, decentralised Oracle networks could ensure data is procured from multiple sources. This approach removes the reliance on a single external point and reduces the risk of exposure to cyber attacks.
Essential Mitigation: A Security Playbook for Community Builders
A few crucial steps need to be taken when building a good security handbook. For project founders, there is a clear set of measures that need to be prioritised to obtain maximum security and protection. For one, independent audits are going to be mandatory, and they can be done through reputable and reliable firms. Opt for two or more just to ensure all bases are covered.
Governance and time-lock delays are going to be another vital action, as they can be used to strategically slow down any hostile takeover votes. A third action would be setting up bug bounties. In doing so, white-hat hackers can be incentivised to find those pesky bugs long before malicious actors can get their hands on them. Don’t stop there, however, as the project should be treated as an evolving target at all times, so lean into continuous threat modelling and stay ahead of the curve of potential attacks.
Security as a Continuous Commitment
Ultimately, tokenised systems are not a one-time set-up. Instead, think of them as a process of vigilance, where the defence constantly needs to keep up with the sophistication of evolved threats. Strong security foundations are a large contributor to unlocking true, long-term value for those tokenised assets.