Scams, Threats, and Security in Web3

Team Exponential
Exponential Era
Published in
8 min readJul 26, 2024

As Web3 and cryptocurrency revolutionize the digital world, they also expose users to a new array of risks and security threats. While the decentralized nature of these technologies promises innovation and transparency, it also opens the door to sophisticated scams, fraud, and technical vulnerabilities. Understanding these dark aspects is essential for navigating the Web3 landscape safely. This article explores the major scams, vulnerabilities, and best practices for protecting yourself in the ever-evolving world of blockchain and cryptocurrency.

Biggest Scams in Web3 and Cryptocurrency

In the rapidly evolving world of Web3 and cryptocurrency, scams and fraud have become increasingly sophisticated, targeting both novice and experienced investors alike. Understanding the most significant scams provides valuable insights into the tactics used by malicious actors and highlights the need for vigilance and security in this decentralized landscape. Here are some of them and their types:

Rug Pulls and Exit Scams

Rug pulls occur when developers create a new token or project, attract significant investment, and then suddenly withdraw all the funds, leaving investors with worthless assets. Exit scams are a broader term encompassing various schemes where creators disappear with investors’ money, often after gaining trust through misleading promises and fake hype. Here are some of the biggest rug pulls and exit scams to date:

  • Squid Game Token Scam: In late 2021, a token named after the popular Netflix series “Squid Game” deceived investors with a seemingly legitimate project. The token skyrocketed in value before the developers executed a classic rug pull, vanishing with over $3 million in investor funds. The lack of transparency and unverified claims about the project’s legitimacy made this scam particularly damaging.
  • One Coin Rug Pull: The One Coin project, which promised substantial returns through its cryptocurrency and investment programs, turned out to be a massive rug pull. Despite its claims of being a revolutionary financial product, the developers executed the scam by pulling out all invested funds, leaving thousands of investors with significant losses. This scam highlighted the risks of investing in projects that lack credible oversight and transparency.
Source: Technopedia

Phishing Attacks

Phishing attacks in the Web3 space often involve fraudulent websites or messages that mimic legitimate platforms to steal sensitive information such as private keys or login credentials. It is one of the most common attacks not just in Web3 but in the internet as a whole, costing billions of dollars in losses annually. These attacks can lead to the loss of assets if users inadvertently provide their details to malicious actors. Here are some of the biggest phishing attacks today:

  • MetaMask Phishing Attacks: In mid-2024, a new wave of phishing attacks targeted MetaMask users by exploiting vulnerabilities in router makers’ support portals. Hackers compromised support portals of major router manufacturers, using these platforms to distribute phishing messages. These messages falsely claimed that users needed to update their MetaMask security settings, leading to the theft of sensitive information from those who followed the instructions. The breach highlights the critical need for users to verify the authenticity of security-related communications and to be cautious with links and instructions received from unsolicited sources.
  • DeFi Platform Phishing: DeFi platforms have also been targets of phishing attacks. Scammers created fake versions of popular DeFi protocols to lure users into entering their private information. Once entered, attackers accessed users’ funds, causing financial losses and highlighting the need for vigilance and secure browsing practices.

Ponzi Schemes and Pump-and-Dump Schemes

Explanation and Mechanics: Ponzi schemes promise high returns to early investors, who are paid using the funds from newer investors. Over time, the scheme collapses when it becomes impossible to recruit enough new investors. Pump-and-dump schemes artificially inflate the price of a cryptocurrency to sell off at a profit, leaving later investors with devalued assets.

Recent Case:

  • Morris Coin Scam: The Morris Coin project was marketed as a revolutionary cryptocurrency with guaranteed high returns. It turned out to be a Ponzi scheme, where the creators used new investors’ money to pay off earlier participants. Once the influx of new investors slowed, the scheme collapsed, leaving many investors with significant losses. This case highlighted the risks of investing in projects that promise unrealistic returns without credible backing or transparency.

Vulnerabilities in Web3

Web3 technologies, while revolutionary, are not without their vulnerabilities. The decentralized and complex nature of these platforms exposes them to unique risks, from regulatory gaps to technical flaws, that can be exploited by malicious actors and undermine user security. Understanding these vulnerabilities is crucial for developing effective defences and securing the Web3 ecosystem.

Complexity and Openness

Security Risks: The complexity of Web3 technologies and the openness of their codebase introduce several security risks. While transparency is a strength of decentralized systems, it also means that vulnerabilities in smart contracts and other codes can be exploited by malicious actors.

Challenges:

  • Smart Contract Vulnerabilities: Smart contracts, which are self-executing agreements coded into the blockchain, are prone to bugs and vulnerabilities. These issues can lead to exploits such as reentrancy attacks or integer overflows, which can be used to steal funds or disrupt operations.
  • Code Complexity: The intricate nature of smart contracts and DeFi protocols increases the risk of errors and unintended consequences. Complex code can be difficult to audit and secure thoroughly, leaving potential weaknesses.
  • Lack of Standardization: The rapid evolution of Web3 technologies often outpaces the development of best practices and standards, contributing to inconsistent security measures and increased risk of vulnerabilities.

Anonymity and Lack of Accountability

Impact on Security: The anonymity provided by Web3 platforms can be a double-edged sword. While it protects user privacy, it also complicates efforts to hold individuals accountable for malicious actions. As more people join the Web3 space and become anonymous, the more incidents will occur. This lack of accountability can foster a more permissive environment for illicit activities.

Challenges:

  • Difficulty in Identifying Malicious Actors: Anonymity makes it challenging to trace and identify individuals involved in scams, hacks, or other malicious activities, impeding efforts to seek justice or recover lost funds.
  • Increased Risk of Fraud: The ability to operate anonymously can embolden scammers and fraudsters, knowing they can evade detection and prosecution more easily compared to traditional financial systems.
  • Limited Enforcement Options: Law enforcement agencies and regulatory bodies often struggle to address issues in decentralized systems due to the lack of identifiable perpetrators and jurisdictional barriers.

Emerging Threats

Emerging Threats: There are plenty of emerging and growing threats in Web3, some of which target inherent vulnerabilities in the system. Here are some of them.

  • Zero-Day Exploits: The discovery of new vulnerabilities, or zero-day exploits, can lead to immediate and severe security breaches. These vulnerabilities are often exploited before they are patched, causing significant harm.
  • Supply Chain Attacks: Attacks targeting the supply chain of Web3 projects, such as compromising third-party services or libraries, can introduce vulnerabilities into otherwise secure systems.
Source: Chainalysis

How to Defend Against Web3 Threats

The decentralized nature of Web3 technologies introduces several unique vulnerabilities that can compromise security and functionality. From regulatory ambiguities to technical flaws in smart contracts, understanding these weaknesses is essential for protecting against potential threats and ensuring the integrity of decentralized systems. As the numbers of stolen cryptocurrencies increase, the more important it is to defend against ongoing threats. Here are some best practices against Web3 threats:

Regular Audits

Conducting regular audits of smart contracts and DeFi protocols is essential to identify and address vulnerabilities. Engage with reputable auditing firms and ensure that audits are thorough and cover all aspects of the code. Frequent audits help in early detection of potential weaknesses and prevent exploits.

Use of Multi-Signature Wallets

Multi-signature wallets require multiple approvals before transactions can be executed, adding an extra layer of security. This approach mitigates the risk of unauthorized transactions and can protect funds from being accessed if one key is compromised. Implement multi-signature wallets for managing significant assets and administrative actions.

DeFi Protocol Enhancements

Innovations in DeFi security, such as integrating insurance protocols and decentralized security services, can provide additional protection against losses from vulnerabilities or attacks. Explore and adopt these advanced security solutions to enhance the robustness of DeFi platforms and reduce risk.

Code Reviews and Open Source Contributions

Encouraging community involvement in code reviews and open source contributions can lead to better security practices and more robust code. Foster a collaborative environment where developers and security experts can contribute to and review projects, helping to identify and resolve issues early.

Community and Developer Actions

The community and developers can also help deal with the growing threat in Web3. It can even be far more affordable than other options. Here are some of the ways they can do that:

Source: Dark Reading

Bug Bounty Programs

Implementing bug bounty programs incentivizes independent researchers and developers to identify and report vulnerabilities in exchange for rewards. These programs can be valuable tools for discovering and fixing issues before malicious actors exploit them. On average, people can earn as much as $3,000 when catching bugs, making this a great and sustainable option for increasing security in Web3.

Security Standards and Best Practices

Adopting and promoting industry-wide security standards and best practices can improve the overall security posture of Web3 projects. Encourage the development and adherence to guidelines that address common vulnerabilities and threats.

Incident Response Plans

Developing and maintaining a comprehensive incident response plan is essential for handling security breaches and attacks effectively. Ensure that the plan includes procedures for identifying, containing, and mitigating incidents, as well as communicating with affected parties and stakeholders.

As Web3 and cryptocurrency continue to reshape the digital landscape, the prevalence of scams, security threats, and system vulnerabilities remains a critical concern. The evolution of sophisticated fraud schemes, coupled with inherent weaknesses in decentralized technologies, underscores the need for heightened vigilance and robust security measures. By understanding these risks and implementing best practices, users and developers can better protect themselves and the broader ecosystem. Ultimately, addressing these challenges through proactive security strategies and regulatory improvements will be crucial in safeguarding the future of Web3 and maintaining trust in this innovative space.

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Team Exponential
Exponential Era

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