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Blockchain Semantics Blog Three Layers Of Cryptocurrency Security

Three Layers Of Cryptocurrency Security

By Amit Dudani | May 30, 2018, 2:52 p.m. GMT

April witnessed one of the biggest bitcoin thefts when the most popular cryptocurrency exchange Coinsecure reported a breach where around 438.318 bitcoins were stolen. These sum up to close to INR 19 crores.  Click here to read more about this breach.

Basically, Cryptocurrency has its security bound in the following three layers:

  1. Coins and Tokens

Whenever you decide to invest in any cryptocurrency the most important thing you should be worried about is its security. When you choose one, in which you want to invest, you take all the risks and vulnerabilities related to the protocol. If anyone understood the loopholes of the network, they can compromise the whole damn thing, including you, no matter what exchange or wallet are you using.

In this layer, we can find two types of cryptocurrencies or tokens that include the coins like Bitcoin, Ethereum, etc. and other ICO issued tokens like EOS or MOBI.To read more about these tokens, click here.

Your research for cryptocurrency protocol from the security perspective should start from checking whether it can be centralized or not.  For example, Bitcoin is now centralized majorly with 4 mining pools. This means that if these 4 mining pools partner with each other, they can easily compromise entire network!

The most important factor to consider when it comes to Proof-of-Stake cryptocurrencies is the Genesis. This is extremely important because the initial stakeholders can vote for transitions and the network will, by default, trust those with higher stakes.

  1. Exchanges

Though Exchanges are meant for Blockchain transactions, you can consider exchanges as normal fiat currency and wallet applications; they are written in custom code with infrastructure security and have nothing to do with Blockchain.

We have encountered numerous security breaches of Cryptocurrency exchanges like Coinsecure, Coincheck, etc. All the hype around cryptocurrencies is majorly because of these data breaches. There are certain exchanges that have started their business without taking preventive measures for security breaches and that is why it is important to choose the right Exchange wisely.

  1. Wallets

The third and the most important layer is linked to your personal security in the world of cryptocurrencies.

This world mainly consists of two types of wallets:

  • Hot Wallet

When you leave your purchased coins in the wallets of exchanges from where you bought them, that storage is termed as a hot storage or hot wallet. Though keeping your coins in hot wallets requires no extra efforts from you, it has drawbacks too. In case of exchanges, your private key remains with the exchanges and hence, the control over your coins remains there as well.

  • Cold Wallet

A cold wallet could be anything like a software, hardware, or even a piece of paper. It requires additional effort to maintain after buying your coins but the entire control will be in your only hands. 

Some people think hot wallets are the safer option as the exchanges are accessible through certain custom protocols that have nothing to do with Blockchain. But It is considered that cold wallets are safe as the control lies in your hands because the private key remains with you. Read more about wallets and how to choose the right one here.

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