In the rapidly evolving blockchain industry, cryptocurrency exchanges have emerged as pivotal hubs that facilitate the majority of crypto trades and transactions. As the adoption of cryptocurrencies continues to surge, both centralized and decentralized exchanges play a growing role in promoting crypto adoption by enabling users to buy, sell, and store their digital wealth. However, the unprecedented growth of the cryptocurrencies over the past 15 years has also sparked new dangers, as cybercriminals target exchanges to exploit vulnerabilities and compromise user funds. Fortifying exchanges with adequate and cutting-edge security measures has become paramount to ensure platform integrity and safeguard user assets entrusted to them.
One of the main concerns for any crypto exchanges is the persistent risk of cyberattacks. From high-profile heists to sophisticated hacking attempts, security breaches not only jeopardize the financial well-being of individual users but also erode trust in the broader cryptocurrency ecosystem. This means that exchanges must implement stringent measures to bolster their defenses, ranging from advanced encryption protocols to transparent functionality.
Types of Crypto Security Breaches
Bridge Attacks - In the cryptosphere, bridges are used to transfer cryptocurrencies between different blockchain networks. Since each layer 1 crypto, such as Ethereum and Solana, exist on their own native blockchain, cross-chain bridges are required to move them back and forth. However, bridges are ripe for hackers to exploit due to the difficulty in building secure cross-chain protocols. Since different blockchain networks often operate via smart contracts written in different coding languages, a truly bug-proof bridge is extremely rare. By the end of 2022, almost $2 billion had already been stolen from various bridging protocols.
Phishing - The term "phishing" refers to the process by which hackers get private data, such as passwords, usernames, or seed phrases, and then use said data to steal money. In order to accomplish this, the hackers typically pose as someone the victim is familiar with, such as a customer service representative from the user’s preferred crypto exchange. In order to combat phishing scams, cryptocurrency platforms like Phemex sometimes add a verification code to their emails so that recipients can confirm the message is from an official channel. Most exchanges nowadays also offer 2-factor authentication to add an additional layer of protection in case usernames and passwords get compromised.
Key Theft - Because centralized exchanges hold client funds in their own wallets, the private key security is critical. Even for a multi-signature wallet, when a hacker is able to access two or more private keys, they can usually often correctly predict the remaining keys and steal assets. Exchanges must therefore implement a tamper-proof management mechanism to safeguard the private keys, and any vulnerabilities in this regard can prove catastrophic. For example, Bitfinex lost over $60 million in 2016 due to poor private key management. Likewise, in 2022, hackers gained access to Deribit, a well-known cryptocurrency exchange, breaching its wallet server and draining $28 million from the exchange’s wallet.
Cryptojacking - This type of attack involves secretly installing mining software on the victim’s computer, which will automatically mine crypto such as Bitcoin, and then transfer it back to the attacker's wallet. It’s often accomplished by injecting malware onto the target’s computer through a phishing email, or corrupted app and software. Cryptojacking is relatively benign compared to some of the other types of hacks, since the victim’s personal funds are not being stolen and it’s often designed to be hidden from the victim. However, computer bandwidth and energy costs are being taken away.
Flash Loan Exploit - These attacks are more common on decentralized exchanges, and have been a sore spot for DeFi development. Essentially, the malicious party takes out a large flash loan from a lending protocol and uses the funds immediately to manipulate the market or take advantage of some arbitrage opportunity. These actions are often taken within the span of a few seconds or minutes, yet can have severe consequences for the projects that are targeted with price manipulation. For example, in 2021 the yield farming aggregator PancakeBunny suffered from a flash loan exploit in which the attacker manipulated and dumped a substantial amount of BUNNY tokens, causing the price to drop by 95% and eroding trust in the protocol.
Major Crypto Exchange Hacks and Vulnerabilities
When a leading crypto platform suffers a security breach, the entire industry is set back because newcomers are more apprehensive in dipping their toes into crypto. Both centralized and decentralized exchanges are susceptible to attacks, and even some of the most well prominent ones have been hacked.
- Binance: In October 2022, cybercriminals targeted the largest cryptocurrency exchange in the world, Binance. They succeeded in stealing $570 million worth of tokens from the Binance Smart Chain network by exploiting cross-chain bridges. While Binance is the biggest centralized exchange, these hackers took advantage of weaknesses in decentralized finance aspects of the BSC network. Evidently, the smart contracts governing BSC and its cross-chain bridges contained loopholes that threat actors could exploit.
- Ronin Network: The largest cryptocurrency hack ever also took place in 2022. The leading GameFi project Axie Infinity’s Ronin Network lost around $625 million worth of crypto when its private keys were compromised by hackers. The Ronin blockchain had 9 validator nodes requiring 5 separate signatures to enable withdrawals, but the hackers were able to find a backdoor through gas-free RPC node to forge the required signatures.
- Bitfinex: This is another example of a platform’s infrastructure vulnerabilities. Exchanges often use various infrastructure providers, but this creates multiple points of failure because if any of the vendors are a weak security link, the exchange could be compromised. An additional example of this is how the CEX Bitfinex partnered with Bitgo for multi-signature management but faulty Bitgo code led Bitfinex to lose $72 million to hackers in 2016.
- FTX: By far the most notorious crypto exchange collapse of all is FTX. However, this example differs from most others in that the incident was caused by internal fraud as opposed to external theft. In November 2022, FTX paused customer withdrawals after a $8 billion hole was found on its books, leading to further revelations of commingled funds. It exposed a major concern for all centralized exchanges - lack of transparency eroded customer trust, since users didn’t know what platform insiders were really doing with their deposited crypto. In the aftermath of the FTX bankruptcy, the crypto exchange industry sought to regain that trust by publishing proof-of-reserves that allowed users to confirm the safety of their assets.
The Safest Crypto Exchange
In order to protect users from an industry rife with scams and hacks, cryptocurrency trading platforms have incorporated innovative security measures. Phemex is one platform that has transformed its focus onto transparency and trustworthiness, in order to give its traders peace of mind at all times. The exchange has and continues to implement novel features that enhance asset protection while staying a step ahead of bad actors.
Deterministic Hierarchical Cold Wallet System
Phemex implements a proprietary wallet security mechanism called a Hierarchical Deterministic Cold Wallet System. It assigns every user a unique cold wallet deposit address, and all deposits are periodically collected in the business's multisignature cold wallet. The funds are only accessible by offline signature.
Phemex handles up to hundreds of thousands of real-time withdrawals each day. Every withdrawal request is put through a stringent risk control system and it is determined to be dangerous, internal operators review the request again manually. Qualified withdrawal requests are processed via an offline signature, meaning that assets are kept in a cold wallet system and all transactions are done offline away from the reach of any hackers. This greatly reduces the risk of security breaches and may be why Phemex has never been hacked in its 4 years of operation.
Monthly Proof-of-Reserves and Proof-of-Solvency
The downfall of FTX spurred most of the top exchanges to increase transparency around how they handle user deposits. Phemex is no different, and the platform maintains 100% of customer assets in reserve at all times so all funds are backed 1:1. This can be verified through Merkle-tree Proof-of-Reserves that anyone can check at any time. Furthermore, in an effort to go above and beyond on its transparency initiative, Phemex also publicizes a portion of its cold wallets so their proof-of-solvency can also be verified. Users can trace the safety and storage of their individual deposits; plus they can see if funds in the platform’s wallet do indeed outweigh the total liabilities for all customer deposits. The exchange updates all of this data every month, so traders can enjoy real-time verification and use Phemex with peace of mind.
Hybrid Web 3 Exchange
In 2023, Phemex pioneered a revolutionary new platform called Phemex Web 3, that transforms the platform from a purely centralized one into semi-centralized by adding decentralized elements such as DAO governance, soulbound tokens, and the Phemex Token. While both CEXes and DEXes can have security vulnerabilities, Phemex aims to combine the best of both worlds. Its Web 3 platform still benefits from the intricate, proprietary cold wallet system that protects user funds, while decentralized operations decrease the risk of any single actor gaining too much influence and maliciously stealing funds.
Artificial Intelligence Security Measures and More
As a platform that continues to operate on the cutting-edge of the latest industry trends, Phemex has been looking to incorporate artificial intelligence into various aspects of its operations. In 2024, the platform is set to unveil its social trading feature called Phemex Pulse which will feature AI-powered chatbots and algorithms to make trading more interactive and enjoyable. The exchange is also researching ways to incorporate AI into its security measures, to always stay one step ahead of bad actors.
Register to get $180 Welcome Bonus!
