Why crypto investors could use extra protection
Protecting yourself against the hidden risks in crypto
Investing in crypto is a risky business. Double-digit downturns are all too common, yet crypto investors are willing to take these odds as these exciting new assets also have enormous upside potential. Risk generally equals returns, but in crypto, there are more risks than just the success or failure of a project.
Exchange hacks, smart contract failures, stolen private keys and wallet compromises are sadly still commonplace in this industry. Meanwhile, millions of new users are pouring into the space and billions of dollars are eagerly waiting to be invested in crypto. But for institutional capital to enter, investors require protection from the unique risks in the industry.
The risk you can’t prepare for
Blockchains are sometimes referred to as trust machines. The open-source code of protocols such as Bitcoin and Ethereum are secured by thousands of different parties and have been proven to be incredibly hard to breach. However, the security of the software built around these blockchains is a whole different story.
To date, close to $3 billion has been stolen from exchanges through hacks from outsiders and fraud from insiders. In September 2020, hackers walked away with over $275 million worth of cryptocurrencies from the popular exchange KuCoin. And as recently as April this year, the founders of the Turkish exchange Thodex took off with hundreds of millions of dollars of their users’ funds.
An innovative solution for this has been to move exchanges onto the blockchain. Decentralized exchanges such as Uniswap and Pancakeswap make it possible for users to trade their cryptocurrencies directly from their wallets and thus without losing control over their assets. Other applications offer more exotic features to crypto enthusiasts who want to do more than just trade.
Smart contracts and DeFi
These exciting innovations are made possible by smart contracts, which are self-executing pieces of software. Together, they form the Decentralized Finance (DeFi) sector within the crypto market. Since its emergence in early 2020, DeFi has rapidly become the most popular use case of smart contracts, with roughly $50 billion locked in DeFi dapps.
This number is, by all means, impressive and it seems like every week there is a breakthrough in what we can do with DeFi. But such value also attracts the best of the best in cybercrime while most DeFi apps still are mostly experimental. Smart contracts underpin this entire sector, but these pieces of software are brand new, complex and prone to mistakes.
What developers want smart contracts to do and how that actually plays out once they’re live can be very different. Since this technology is so young, errors and bugs in smart contracts are commonplace. What’s worse, these flaws mostly surface after the software is actively used and a lot of value is already locked in the applications.
In October 2020, the DeFi protocol Harvest Finance was breached through a series of exploits and users lost $25 million. About a month later, hackers took about $20 million out of the Pickle Finance app. And late May 2021, it was Pancake Bunny that got attacked by an elaborate scheme with the hackers gaining over $40 million at the expense of Bunny holders.
A whole lotta risks
As frustrating as it might be, these and various other risks are still an inescapable aspect of crypto today. Individuals still lose their private keys daily to hackers, new crypto wallets don’t provide the security they promise and new token models have not been tested and tried enough to assure that they can’t be exploited.
There is still a lack of legal clarity, which makes it hard for traditional insurers to step in. The organizations behind some popular exchanges and applications are also unknown, which makes it impossible to make claims in case something goes wrong. Crypto is the wild west of finance and requires a new approach to safeguard users from risks that they currently can’t protect themselves against.
A unique solution for unique problems
It is still early for the cryptocurrency industry, but more and more retail and professional investors are waking up to its potential. Especially institutional capital is needed to take this industry to the next level, but without proper protection, this wealth will remain on the sidelines.
At the experimental stage in which the industry still is, an occasional security breach in exchanges, wallets and smart contracts will continue to happen. This means that a lot of capital can’t responsibly flow into the space without protection from the industry-unique risks. Meanwhile, the industry keeps evolving at breakneck speed and won’t wait for regulatory clarity or flawless smart contracts and infrastructure.
This problem requires an industry-unique solution that provides protection from the many things that can go wrong. Bright Union provides exactly that, a blockchain-based risk coverage platform that helps anyone protect their capital from the hidden risks in crypto.
About Bright Union — the 1Inch for crypto coverages
Bright Union is a blockchain-agnostic DeFi coverage aggregator and accelerator. Our mission is to make the crypto risk markets work. On the DeFi Coverage Platform, our future community can cover their own assets, stake and earn in coverage staking pools, and last but not least join the Bright Union staking pool.
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