New Cryptocurrency Security Challenges Arise Around Staking Digital Assets and Its Safety
“Staking can be described as purchase of cryptocoins and holding them in a cryptocurrency wallet for a period of time.”
The cryptocurrency world is rapidly growing in adoption and value after the recent bullish run in March. Bitcoin (BTC) price is currently trading above $5,000 USD in the past 2 weeks bringing the cryptocurrency above the $180 billion USD. While the investors in the field enjoy massive benefits from their cryptocurrency investors, HODLers in the field are making passive income from staking of their coins. However, in the quest of staking, these HODLers face massive security challenges that can lead to the loss of their digital assets.
The proof-of-stake (POS), which first came to light when it was proposed in a talk forum by Quantum mechanics in 2011, can generate wide-ranging returns depending on the coin type and amount held. Unlike proof-of-work, proof-of-state has no miners but instead has validators and it doesn’t let people mine new blocks instead mint/forge new blocks. The act of staking allows quick validation and confirmation of the transaction while sacrificing decentralization on the other hand.
CHALLENGES OF PROOF-OF-STAKE
The media speaks on the challenges proof of stake blockchains face in the financial sense of view. Emphasis placed on the financial concerns has outweighed the actual challenge of security which is slowly killing the industry. The Proof- of – Stake (PoS) platforms face a huge security concern as the staking coins are stored on hot online cryptocurrency wallets for convenience, increase in hacks of exchanges and an influx of transactions on the website. We focus on the security challenges most “stakers” face below.
Storing Digital Assets On Hot Wallets
Most of the cryptocurrency HODLers store their digital assets on online wallets which is a risk as their computers can get hacked. Once hacked and the IP address exposed to the hacker, the security to your private key to your wallet will be compromised. Unlike PoW mechanisms where no private key is needed to mine, PoS mechanisms require users to keep their keys online. This compromises your funds and might lead to theft of your digital assets.
Staking Pools Are Getting Compromised
Staking is usually carried out in pools to increase the validation rewards of the staker. These pools, however, present a different problem altogether as the pool can get hacked. Hackers focus on these pools as they have larger amounts of cash. Large corporations in the world the face hackers every other day will pools be able to counter them off?
Increase In Transactions On The Network
More online transactions increase your risk of exposing your IP address to hackers but even coins which don’t require a computer that is always online like NEO can still have security issues. With NEO, your IP address is exposed when you perform a transaction to claim your staking rewards. This introduces the potential to be hacked. Particl which recently introduced cold-staking hardware even acknowledged that:
“No matter how secure the staking process is, users still need to execute transactions to either spend or sell their staking rewards or rearrange their setup. That means private keys still need to ultimately be exposed in plain text for a moment.
Solutions To The Staking Consensus
Many will ask, is there a way to reduce the chances that staking transactions will expose your IP address? Yes there is although still tricky since the networking tools necessary to properly control traffic are hard to get.
How Can We Protect Cryptocurrency When Staking
Some address it by setting up a VPN proxy. VPNs are notoriously complex where even one misconfiguration can result in no protection.
Alternatively instead of setting up your own VPN, one can set up their own mini-relay network that can proxy traffic on and off multiple servers globally. This has been made easier by the power of high-quality open source blockchain and peer-to-peer networking implementations.
Another way is to use multiple servers and have traffic exit off of multiple nodes leaving hardly any ability to trace the location of the server.