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Cryptographic immutability only works if all layers are secure

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Cryptographic immutability only works if all layers are secure

With the growing institutional interest and adoption of various crypto-assets, including bitcoin but also many other crypto-related applications, it seems worth revisiting an oft-mentioned, but potentially misunderstood aspect of crypto-based assets. on the blockchain. In any conversation, presentation, or casual discussion around blockchain or crypto-assets, one of the most often cited traits of crypto is the immutable (non-hackable) nature of blockchain transactions. As has been proven time and time again, via hacks and other shortcomings which have cost investors billions of dollars on an annual basis, the protocols, exchanges and applications that investors operate are not – in fact – immutable.

This may seem like a basic concept, and hardly worth mentioning again, but given the speed and scope of adoption by institutions around the world, it’s not something that should be overlooked. Although the underlying blockchains may be immutable, although this has also proven not to be an entirely accurate statement, the proliferation of applications and use cases that depend on the blockchain infrastructure blocks is far from immutable. Many of these apps are designed to make the user experience simpler, easier, and more convenient; so many laudable ambitions. That said, there are several things crypto-asset advisors, investors, and users should keep in mind as development, adoption, and (unfortunately) hacks seem destined to increase.

Let’s take a look at a few reasons why – despite almost constant repetition – crypto isn’t necessarily as immutable as one might think.

Exchanges are not immutable. Crypto exchanges and connected apps have regularly been hacked, hacked, or otherwise compromised, leading to Billions investor losses. These losses are compounded by the fact that most – if not all – of these losses are not covered by investor insurance or other traditional products. As investors of all sizes continue to show increased interest in investing and trading crypto, it should also be noted that the user interface for logging into these exchanges does not have security or crypto compatible with the blockchain. For example, if a user has an exchange application installed on a smartphone or device, the only security protecting access to these funds is the traditional password protocols used to access the device and other apps.

In other words, it doesn’t matter if the blockchain is immutable if the password to access applications that in turn provide access to investors’ funds are relatively easy to breach.

Crypto-assets are not perfect. This is something that has been painfully proven time and time again over the past few years of growing enthusiasm for crypto, not all crypto-assets were created with the same duty and care. Crypto-assets that have proven to be complete scams, those whose underlying value has been seriously questioned during the recent crypto winter, and the realization that many projects will face difficult questions, have dampened enthusiasm for new applications. Innovation and creative destruction are part of every asset class and market cycle; crypto is no exception to this rule. It should be noted, however, that in addition to the issues raised above, there have been examples of blockchain applications – designed to increase interoperability – falling victim to major hacks.

As always, investors and users should do their due diligence, no matter how “boring” that may sound.

Smart contracts are not magic. Smart contracts, which are executable code embedded in an underlying blockchain, have been highlighted quite often as integral to the evolution of the larger blockchain ecosystem. Whether forming the basis of decentralized finance (DeFi) applications, enabling decentralized autonomous organizations (DAOs) to function properly, or enabling blockchains to interact with legacy technology systems, smart contracts have grown in importance with all justifiable reasons. However, such dependency and widespread development also provides a ready-made opportunity for unethical actors to access a wide range of applications.

Examples abound of how errors or deliberate errors in coding have allowed hackers and other malicious actors to to exploit these use cases. Considering how quickly the DeFi sector has grown – with total value locked (TVL) still totaling tens of billions even during this crypto winter, this is no trivial matter. Additionally, the role that smart contracts play in enterprise adoption cannot be overstated, and smart contract vulnerabilities pose a significant risk to future implementation.

As the blockchain and crypto space continues to evolve and grow in creative and innovative directions, much of this development is built on the security foundation of these applications. Immutability is almost always touted as one of the biggest strengths of blockchain-based applications, and it’s true; this is a powerful reason that has helped drive adoption. What should always be kept in mind, however, is that immutability of any blockchain or crypto application is only possible if each layer is equally secure. Advisors, investors and users would be well advised to keep this salient fact in mind when considering potential opportunities.

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