Published on July 5th, 2023

Decentralized finance (DeFi) is quickly becoming the go-to financial system for investors around the world.

As a result, the DeFi industry has grown rapidly and is now worth billions of dollars. However, with the rise of DeFi also comes the need for security measures to protect user funds, as scams are very common in the crypto world.

This article will explore the best practices for DeFi security so that users can protect their assets from scams while enjoying the benefits of decentralized finance.

We will also put in evidence some use cases to bring to attention the various security issues that users can face while building or using DeFi protocols.

One of the more prominent cases is RING Financial and how the vulnerability of its smart contract led to losses for its participant noders.

Understanding The Risks In DeFi

The decentralized nature of DeFi platforms comes with its own set of risks. Since there’s no centralized authority, the security of the system depends on the users.

The risks in DeFi include phishing attacks, scams, smart contract vulnerabilities, and hackers exploiting bugs in the code.

One of the most significant risks in DeFi is the potential loss of funds due to human error, such as sending funds to the wrong address or using a weak password.

Speaking of the vulnerability of smart contracts that has led to scams, several DeFi like Beanstalk and RING Financial have already fallen victim.

The Hack Of The Beanstalk DeFi Protocol

The Hack of the Beanstalk DeFi Protocol was a major event in the world of Decentralized Finance (DeFi).

On September 3, 2020, the Beanstalk DeFi Protocol was hacked and over $6 million worth of Ethereum was stolen from users’ wallets.

The attack was the result of a malicious actor taking advantage of an exploit in the Beanstalk code. The hackers were able to drain funds from users’ wallets by siphoning them from the protocol’s liquidity pools.

The attack highlighted the risk of using decentralized protocols and brought to light several issues with the security of DeFi systems.

Many experts argued that the hack could have been prevented if there had been better security protocols in place to detect and prevent malicious actors from exploiting vulnerabilities in the code.

Security Flaws In Smart Contracts: The Case Of RING Financial

RING Financial was one of the fastest growing DeFi platforms in the crypto world in recent years.

RING Financial wanted to create a unique platform where one could have a global view and access to the best staking protocols as well as participation in them.

Thanks to his RING Financial Token, users could generate passive income on their tokens while staying safe from scams or fraud.

The RING Financial Token provided its holders with numerous other advantages. The first benefit of holding a RING Financial Token is the ability to access a wide range of financial services.

Through the use of this token, users can access banking services, trading and token purchasing opportunities, insurance products, and more.

This gives holders of the RING Financial token much greater control over their finances than they would have with traditional means of transacting.

The second benefit is that RING Financial Token is backed by a decentralized network of computers, which makes it much more secure than other forms of digital currency.

This means that RING Financial users can trust that their transactions are safe and secure, and that their funds are protected from hackers and other malicious actors.

The final and key advantage was that RING Financial Token holders could benefit from the token’s low volatility, which helps to make it an attractive asset for long-term token purchase.

However, In July of 2019, a security flaw in the smart contract for the RING Financial token was exploited by hackers.

There was an error in the code of one of the parts that make up RING Financial. This part had not inherited the protection function that was applied to the main part (the RING Financial Token part).

This is a vulnerability of the smart contract, because usually in web development, the secondary parts inherit the functions of the main parts.

And in the case of RING Financial, the hacker took a large number of RING Financial rewards, which caused a large drop in the project. RING Financial has been put on hold for security reasons.

The attack highlighted the need for more secure smart contracts that can prevent such malicious activities from occurring.

As blockchain technology continues to evolve, developers must remain vigilant and ensure their contracts are designed with security in mind to protect users from potential losses.

It is critical that users also take steps to protect their assets, such as performing regular transactions audits and token purchasing  in secure wallets.

Through implementing these measures, noders can be sure that they are taking the necessary precautions to protect their funds from similar security threats.

Best Practices For Protecting User Funds

To protect your funds in DeFi, it’s essential to follow best practices for security.

These include using robust passwords, leveraging multi-signature wallets, and auditing smart contracts.

Multi-Signature Wallets

Using Multi-Signature Wallets is one of the best ways to protect yourself from scams in the crypto world.

A multi-signature wallet is a type of wallet that requires multiple signatures to approve a transaction.

This means that even if one of the signatories’ accounts is hacked or compromised, the funds will remain safe.

Multi-signature wallets can be set up in various ways, but the most common is to require two out of three signatures to approve a transaction.

This type of wallet is highly recommended for users who are dealing with significant amounts of funds.

Decentralized Identifiers

Decentralized identifiers (DIDs) are a unique type of identifier that can be used to verify the identity of users in DeFi platforms.

DIDs are decentralized, meaning that they are not controlled by any central authority, which makes them more secure.

DIDs can be used to protect user’s identity and prevent phishing attacks, which are a significant risk in DeFi.

Cold Storage

Cold storage is the practice of storing digital assets offline, away from the internet. This is the most secure way to store funds in DeFi because it eliminates the risk of hacking.

Cold storage can be achieved by using hardware wallets, paper wallets, or even by writing down your private key on a piece of paper and storing it in a safe place.

Smart Contract Auditing

Smart contracts are the backbone of DeFi platforms. They are self-executing contracts that automatically execute the terms of an agreement when certain conditions are met.

Smart contracts are a powerful tool, but they can also be vulnerable to bugs and security vulnerabilities.

To protect your funds from scams in DeFi, it’s essential to audit smart contracts before using them.

Auditing smart contracts involves reviewing the code to identify vulnerabilities and bugs that could be exploited by hackers.

Insurance For DeFi Platforms

Insurance for DeFi platforms is a relatively new concept, but it’s becoming increasingly popular. Insurance can provide users with an additional layer of protection against losses due to hacks or other security breaches.

Insurance policies can be purchased directly from DeFi platforms, and they typically cover a percentage of the losses incurred by users in the event of a security breach.

In conclusion, DeFi security is essential to protect user funds from scams in the growing DeFi industry. By following these best practices, users can significantly reduce their risk of loss due to hacks, scams or other security breaches.

Image Source: freepik.com

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