New cryptocurrencies can be secure, but they also carry additional risks compared to well-established ones like Bitcoin and Ethereum. However, many new crypto projects are now taking security more seriously by having their code thoroughly audited and reviewed by independent security experts before launching. Additionally, responsible crypto teams are also adopting secure coding practices right from the start. This includes using trusted cryptographic libraries, managing keys securely, and performing regular security tests.
Although new cryptocurrencies still face additional scrutiny due to their unproven nature, these proactive steps show that dedicated projects are making security a top priority from the ground up. By implementing robust security measures early on, these new crypto projects can significantly boost their security and build trust with both users and investors.
Security Risks of New Cryptocurrencies
Many new projects may prioritize security and undergo thorough audits and testing before launching; however, not all new cryptocurrencies will be secure. Keep the following in mind before investing in a new cryptocurrency:
- Unproven technology: New cryptocurrencies often use innovative blockchain technologies or consensus mechanisms that have not been thoroughly tested or audited for security. Michael Graw from Techopedia points out that new crypto launches won't have a proven record or past data to assess their performance or reliability. Without a detailed analysis on new cryptos, investors risk investing in a new cryptocurrency and have no idea if there is an increased risk of undiscovered vulnerabilities.
- Lack of audits: Established crypto like Bitcoin has had its code rigorously reviewed and audited by independent experts, but newer cryptocurrencies will not have received the same level of scrutiny.
- Smaller developer teams: Several newer cryptocurrencies are developed by smaller teams or individuals, which makes it somewhat of a challenge to maintain and update the codebase regularly to address any potential security issues.
- Limited adoption and testing: With fewer nodes and users on the network, new cryptocurrencies could potentially have less real-world testing and adoption, making it harder to identify and test.
- Centralization risks: The main idea behind cryptocurrencies is decentralization, meaning that there is no central authority in charge of the network. New cryptocurrencies with centralized structures defeat the purpose, increasing the risk of a single point of failure or the potential for malicious actors to gain control over centralized cryptocurrencies.
For example, in January 2024, Abracadabra Finance, the platform behind the stablecoin Magic Internet Money (MIM), suffered a major security exploit that resulted in a loss of approximately $6.5 million. This hack exploited a vulnerability in the project's smart contract, specifically a rounding issue that the developers called a "precision loss." This led to MIM's market cap plummeting before being restored. This hack highlights the importance of robust security audits, code reviews, and responsible vulnerability programs to identify and reduce the issues before exploitation by threat actors.
Security Advantages of Cryptocurrencies
Decentralization and Lack of Single Point of Failure
Cryptocurrencies operate on decentralized blockchain networks with no central authority or intermediaries like banks. This eliminates the risk of a single point of failure that could bring down the entire system. The distributed nature makes cryptocurrencies more resilient to attacks or system failures. The concept of decentralization and lack of a single point of failure is not limited to just cryptocurrencies, but it also applies to the various components and entities like decentralized crypto exchanges.
Compared to decentralized exchanges, centralized crypto exchanges can act as a single point of failure and can be targeted by malicious actors. These exchanges are controlled by one entity, which makes it easier for hackers to manipulate account balances and steal funds. For example, in March 2018, a security expert found vulnerabilities in 8 major centralized exchanges that allowed manipulation of Ethereum account balances. Hackers registered new accounts, unlawfully increased the balance, and withdrew the inflated accounts. Although centralized exchanges tend to list the more established and popular cryptocurrencies, investors should opt for decentralized exchanges for new cryptocurrencies or meme coins.
Cryptographic Security
Cryptocurrency transactions are typically secured through advanced cryptographic techniques like hashing functions and digital signatures. This cryptography makes transactions extremely difficult to tamper with, forger, or counterfeit.
Transparency and Immutability
All transactions on a crypto blockchain are publicly visible and verifiable, which increases transparency. Once a transaction is recorded on the blockchain, this data is immutable and cannot be altered in any way, providing an auditable trail. This lowers the risk of fraudulent crypto transactions.
Anonymity and Privacy
Crypto transactions are pseudonymous, which means that they are not directly tied to a user's real identity. This is one of the main reasons why many users prefer crypto gambling using Bitcoin or Litecoin, for example. Users can maintain a level of privacy using their wallet addresses without revealing their identities, financial information, or address details. This privacy protects against surveillance and potential censorship.
Control Over Funds
With new and established cryptocurrencies, you have full control over your funds through private keys. As long as the private keys are kept secure, no third party like a bank can freeze or seize the funds. This completely eliminates counterparty risks that are common in traditional finance.
Secure Storage and Wallets
One key security advantage of cryptocurrencies is the ability to store them in a personal wallet and hardware wallets. This ensures crypto is extremely secure from hacking attempts or theft.
Best Practices for Evaluating New Cryptocurrency
When considering investing in new cryptocurrencies like meme coins or altcoins, consider the following security aspects:
Research the Development Team
Assess the experience and track record of the development team, particularly in security and cryptography. A team with limited expertise in these areas could potentially overlook critical security measures. The Nomad bridge hack in 2022 resulted in a $190 million loss and is a prime example of how coding errors and a lack of rigorous testing allowed hackers to exploit vulnerabilities when they should have been a top priority from the initial development stages.
Independent Security Audits
New cryptocurrencies should have their code thoroughly audited and reviewed by independent security experts and firms. This will help identify and fix potential vulnerabilities before launching.
Decentralization and Node Distribution
A high level of decentralization, with nodes well distributed across the network, will reduce the risk of a single point of failure or the potential 51% attacks where a single entity gains control over an entire network.
Project Activity and Community Engagement
Active community engagement, transparency about a new crypto project's security measures, and responsiveness in addressing potential issues can help identify and reduce risk early on. By getting the community involved, being transparent, and collaborating on security measures, new crypto projects can tap into the collective expertise of their users. This helps spot and fix potential security issues early while also building trust, credibility, and a supportive ecosystem, which are all vital for long-term success.
Secure Storage Solutions
Implementing multi-signature wallets, which require multiple private keys to authorize transactions, can significantly improve security. Proper key management practices, like using hardware wallets, are also crucial.
Conclusion
If new cryptocurrencies dedicate sufficient time and resources to implementing industry-standard security measures and conduct rigorous audits, they can significantly improve their security. While the underlying blockchain technology and cryptography provide significant security advantages, new cryptocurrency projects must prioritize security from the initial development stages to reduce risks and vulnerabilities effectively.
