How can a Decentralized Exchange Prevent Hacking

Aug 12, 2021

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 developmentand 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.



Articles authored by brugu softwaresolutions

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