How Does a Decentralized Exchange Prevent Hacking?

April 10, 2023
How does decentralized exchange prevent hacking

Decentralized Exchange (DEX):

A decentralized exchange (DEX) is a digital currency platform that enables users to purchase cryptocurrencies directly from one another over an online platform without using a middleman. It differs from a traditional centralized exchange in that a third party (such as a bank, trading platform, government agency, etc.) often oversees the security and transfer of assets between two parties and takes custody of user funds.

Blockchain technology and the cryptocurrency market are both built on decentralization. It redistributes electricity from a centralized source and gives it to users instead. The operation of many traditional financial services is also being redesigned by the idea of decentralization. 

 

What kinds of hacks could a Decentralized Crypto Exchange face?

No two DeFi attacks have a similar look. However, we separated the breaches according to the lacking points:

      • Smart Contract Code Exploits:

    Decentralized Exchanges (DEXs) differ from centralized exchanges in how they facilitate purchasing and selling cryptocurrencies. When purchasing crypto exchange software for a DEX, it is evident that the exchange will carry out transactions using self-executing smart contracts. 

    However, development companies for cryptocurrency exchanges must guarantee that the smart contracts are thoroughly audited.  Reentrancy on a particular function, cross-function, and other attacks are some of the most frequent ones that can occur due to coding errors. Any exploit could result in the possible loss of assets because DEX smart contracts handle the assets.

    If you purchase bitcoin trading software, ensure it has undergone thorough testing and auditing. 

        • Smart Contract Logic Exploits:

      Smart contracts might not be created in a manner that fully accounts for all the conditions due to a lack of development experience. A great example of a smart contract logic exploit is what occurred with the Harvest Protocol. Essentially, a pool’s impacts of temporary loss of USDC and USDT were exploited. This indicates that the smart contract logic was poorly worked out.

       

      How Can These Hacks Be Prevented?

      A DeFi project, protocol, or DEX must take the following precautions to increase security:

      how can these hacks be prevented
        1. 100% Test coverage:

      Only by conducting a 100% test coverage of every piece of code can it identify a functionality problem or a design flaw. Consequently, testing the protocol’s or project’s smart contracts and end-to-end code is required.

        1. Smart Contract External and Internal Audits:

      The filled security of the projects cannot be guaranteed, not even with 100% test coverage. Therefore, only buy crypto exchange software undergoing internal and external testing.

      To ensure the code is impenetrable, many reputable audit organizations run extended tests while testing it under all conceivable circumstances.

        1. Use multi-sig:

      Make sure your protocol has many signatures to protect it. This ensures that the hacker cannot access the asset pool even if the hacker gets on one secret key. There are two approaches you can take.

      The first needs a unique multi-sig contract, and the second entails creating a multi-sig logic integrated into the DeFi protocol. 

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        1. Bug Bounty programs:

      Running bug bounty programmes is another method to ask your community to find the weak spots in the code. This helps you identify security risks while gaining the audience’s confidence in your exchange or DeFi protocol.

      Bug reporting tool have the potential to be used for bug bounty programs, but it’s important to acknowledge that these tools may not be fully optimized or tailored for this particular use case.

       

      Conclusion:

      Decentralized Exchanges are among the crypto ecosystem’s most potent devices,  enticing investment. One must ensure that the decentralized crypto exchange software they are about to purchase is not hackable, just as they would when purchasing Bitcoin trading software and ensuring it has been thoroughly tested. 

      At Rain Infotech Private Limited, we create decentralized exchange systems with institutional security. Our blockchain development company prioritise attaining the highest security standards to reach market-leading features and world-class performance. 

      CTO at Rain Infotech Private Limited | Blockchain Enthusiasts | Hyper Ledger Fabric | Certified Bitcoin, Ethereum & Blockchain Developer
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