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The recently released report by Chainalysis on crypto hacking makes for genuinely scary reading. A record amount of US$3.8 billion was stolen from crypto businesses during 2022; a year dubbed “the biggest year ever in crypto hacking”. This brings new meaning to the crypto term “rugged”.
A largely unregulated industry, cryptocurrency has always been under the scrutiny of authorities due to the decentralized nature of the space. Large amounts of funds can easily be transferred without any oversight; and, despite the transparent nature of blockchain as a public ledger, there are a number of DeFi services available that can negate that transparency. Sophisticated players can take advantage of exploits in smart contracts and protocols; and, when you have bad actors backed by a largely aggressive, heavily sanctioned national entity, things can get very messy.
A major player in crypto theft is North Korea, with US officials linking the pariah government to an estimated US$1.7 billion hacked in 2022. This equates to roughly quadrupling the amount of US$400 million hacked by North Korea during the previous year.
"For context, North Korea's total exports in 2020 totaled $142m worth of goods, so it isn't a stretch to say that cryptocurrency hacking is a sizable chunk of the nation's economy," as per the Chainalysis report.
According to US officials, this surge of hacking activities by the North Korean government is driven by heavy U.N. sanctions, as well as the COVID-19 pandemic. Draconian sanctions placed on North Korea in 2016-17, in response to its nuclear & missile tests, have placed the country’s economy under major strain. North Korea, as per experts, is using the cryptocurrency sector as a means to raise revenue; primarily to fund the development of its nuclear arsenal, as well as to aid its fragile economy.
Alarmingly, North Korea had conducted six nuclear tests as well as the most missile tests ever conducted in a calendar year in 2022. Tests included short-range, mid-range as well as long-range missiles designed to be able to reach anywhere on the US mainland.
Decentralized Finance protocols are the primary targets for hackers & makeup over 82% of the cryptocurrency stolen in 2022, with a major focus on cross-chain bridges. DeFi developers tend to prioritize growth, typically over security & all other factors, in order to attract users and holders, making them attractive & vulnerable victims for bad actors.
Cross-chain bridge smart contracts are especially a focal point for hackers. Bridges effectively become “huge, centralized repositories of funds backing the assets that have been bridged to the new chain”, and any errors in the smart contract code can be found and exploited by hackers. “Mixers”, which obfuscate the origins of the funds, typically form the cornerstone of the laundering process. US authorities sanctioned Tornado Cash in August 2022, however, numerous such services still exist and are utilized by hackers.
Despite an ongoing lawsuit challenging the ban on Tornado Cash, US authorities continue to target these crypto-mixing services, amongst other measures being taken. Furthermore, Halborn COO, David Schwed, advises that protocol developers look to more traditional finance institutions for examples of how to implement their own security features, “You don’t need to move as slow as a bank, but you can borrow from what banks do.” Developers are recommended to look at testing protocols under hacking simulations on test nets, monitor mempools for suspicious activity, and build out automated circuit breakers to pause or halt transactions, amongst other steps that can be taken to prevent hacks from occurring.
However, not all is doom & gloom. Despite facing a sophisticated enemy, law enforcement agencies are making strides to counter the threat. US authorities, for the first time ever, managed to recover US$30 million from North Korean-backed hackers in 2022; seizing funds the hackers had stolen from the Axie Infinity Ronin bridge hack. Regulators will also have a role to play here by implementing minimum security standards for protocol developers to follow.
In a burgeoning new industry, there will obviously be bad actors ready to ruthlessly take advantage in order to illegally benefit their own pockets. By tackling the problem across multiple fronts, developers, and authorities can and are working on providing more security for their users as well as the broader crypto market.