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Blockchain know-how has skilled exceptional adoption lately, pushed by its use throughout a broad spectrum of establishments, governments, retail buyers, and customers. Nonetheless, this surge in blockchain use and cryptocurrency funding has raised issues amongst governments and regulatory our bodies. The decentralized nature and cross-border capabilities of blockchains, together with an increase in scams, hacking incidents, and different illicit actions have underscored the necessity for scrutiny. This concern is heightened by the absence of complete regulatory measures.

This weblog offers steering for each people and organizations on the necessities of threat due diligence when contemplating the adoption or funding in blockchains, cryptocurrencies, and tokens. It is very important be aware this steering is not supposed as monetary recommendation. As a substitute, its predominant purpose is to assist customers determine and keep away from scams and investments which will entail substantial dangers. However, for monetary recommendation that’s personalized to particular person conditions, readers are inspired to hunt the counsel of a certified skilled.

The heightened threat related to blockchain and cryptocurrencies for adopters and buyers could be attributed to a common lack of awareness and transparency in relation to their cybersecurity features and dependability. Including to this threat is the rise of distinctive assault varieties particular to the blockchain surroundings, which differ from conventional safety points. Blockchain safety, by its very nature, typically diverges from commonplace cybersecurity practices originating from its decentralized, immutable, and cryptographic nature.

This divergence has led to the emergence of latest threats that aren’t generally identified amongst many customers. Examples embrace 51% assaults, sensible contract vulnerabilities, Finney assaults, and Vector76 assaults, which aren’t sometimes coated by typical cybersecurity measures. Most assaults on blockchains revolve round sensible contract and consensus mechanism exploitation which aren’t current in modern IT or OT centralized digital environments.

To raised emphasize the necessity for in-depth understanding of the safety and reliability options of blockchains and cryptocurrencies, we’ll look at two real-world blockchain assaults. These assaults led to appreciable monetary repercussions, serving as cautionary tales in regards to the potential dangers concerned. These incidents embrace the Poly Community Cross Chain Contract Exploitation and Ethereum Traditional 51% assault.

Case 1: Poly Community Cross Chain Contract Exploitation

The Poly Community hack occurred on the August 10, 2021, with $600 million stolen in additional than 12 completely different cryptocurrencies. The hackers exploited a bug to mismanage entry rights between two sensible contracts dealing with token transfers between completely different bridged (linked) blockchains and divert the funds to 3 malicious pockets addresses.

The attacker exploited the performance “EthCrossChainData,” which data an inventory of public keys that authenticate the information coming from the blockchain, permitting the attacker to switch the checklist to match its personal personal keys and redirect funds to the chosen malicious wallets. This type of hacking incident may need been prevented with the implementation of thorough vulnerability assessments of the supply code. A notable subject is the inadequate data supplied to buyers and adopters relating to the inherent dangers related to cross-chain transactions. These dangers stem from the advanced coding essential to execute such operations, typically not absolutely understood by these concerned.

Case 2: Ethereum Traditional 51% Assault

The Ethereum Traditional blockchain suffered 4 “51% assaults,” during which a single entity gained management over many of the community’s computing energy by introducing many community shoppers/nodes with excessive computational capability overshadowing the computational energy of authentic nodes. This opened the door for adversaries to govern community transactions and steal Ethereum Traditional cash. Buyers and adopters are sometimes unaware of the dangers entailed in proof-of-work consensus mechanisms that facilitate low hashrates.

The hashrate originates from the processing energy of validator nodes that lend their computational energy to validate and safe blockchain transactions. Within the case of a low hashrate, attackers can exploit the community by overpowering it. This could have a big affect for buyers, as they’ll lose a big quantity of their cash. Such incidences could possibly be mitigated by monitoring the hashrate of the blockchain community to implement proactive measures as soon as the hashrate falls below a threshold, all whereas monitoring on-chain exercise for double spend makes an attempt.

Blockchain Evaluation Methodology

Adopters, buyers, and huge organizations are primarily involved with choosing digital property which might be dependable and safe to safeguard towards the lack of worth, whether or not by fraud or different unexpected problems. Subsequently, we’ll concentrate on presenting an empirical methodology to mitigate related dangers. It goals to information the number of dependable, and safe blockchains, cryptocurrencies and tokens, offering a framework for safer funding and adoption selections.

The proposed methodology facilities round 9 basic pillars: Blockchain Sort, Consensus mechanism, Group, Whitepaper, Supply code, Historic hacks and vulnerabilities, Pockets distribution, Governmental and Authorized Scrutiny and Liquidity. Though the attributes at the moment used to evaluate blockchains and cryptocurrencies are deemed sufficient, you will need to acknowledge that these standards are prone to evolve alongside the development of blockchain know-how and cryptocurrencies. Future adjustments and enhancements in these applied sciences could be inferred from new options that builders introduce to blockchain methods and cryptocurrencies which might be typically described of their whitepapers or on GitHub pages.

Blockchain Sort

Blockchain sort refers back to the entry rights and diploma of management that customers have over a particular blockchain. There are 4 predominant varieties of blockchains:

  • Public: Anybody can learn and write (transact) on a public blockchain comparable to Bitcoin. That is probably the most accepted sort of blockchain by way of safety and reliability as all stakeholders have visibility on all transactions and on-blockchain knowledge. Usually, public blockchains have additionally a excessive diploma of decentralization, which minimizes assaults associated to high-influence nodes within the community.
  • Personal: Solely the proudly owning group(s) can learn and write on the blockchain and, normally, solely a handful of nodes can write on the ledger (e.g., Hyperledger). Though such networks are normally sooner than public blockchains, they don’t seem to be clear, and stakeholders can manipulate blocks at will to the extent that they’ll even affect the immutability of blockchain by altering earlier transactions or delete blocks.
  • Consortium: Like personal blockchains, consortium blockchains (e.g., Ripple) additionally provide little to no transparency and are sometimes extremely centralized. The one distinction is that consortium blockchains compromised of a number of organizations as a substitute of a single entity.
  • Hybrid: Hybrid blockchains inherit architectural designs from private and non-private blockchains (e.g., Komodo). The diploma to what traits a hybrid blockchain inherits will depend on a particular answer and its function. Often, a big a part of the actions and transactions happen on the background as a part of a personal ledger (blockchain), the place the outcomes of these actions are broadcasted on a public blockchain. Whereas hybrid blockchains enhance efficiency, they compromise the trustless and absolutely clear nature of user-blockchain interactions. In these methods, customers are required to put full belief within the group(s) overseeing the personal elements of the transactions.

In evaluating blockchain threat ranges, public blockchains sometimes current the bottom threat. Their open-source nature fosters transparency of their operations, making their processes and transactions extra seen and accountable. Hybrid blockchains carry a reasonably greater threat attributable to their semi-transparent nature, the place not all components are publicly accessible or managed by customers.

Personal and consortium blockchains characterize the very best threat class. These blockchains require customers to put full belief within the controlling entities, as they lack the transparency and decentralization of public blockchains. This heightened threat is as a result of potential for misuse or mismanagement by the controlling events.

To precisely decide the kind of blockchain and mitigate dangers, significantly relating to token (creation of crypto tokens could be created with minimal effort making them ultimate for scams), it’s advisable to undertake three methodologies:

  • Evaluation of the venture’s web site and related whitepaper describing the crypto venture to confirm its worth and reliability, an instance could be the Ethereum whitepaper.
  • Go to the GitHub web page containing the supply code of the cryptocurrency or token of curiosity to validate its opensource and clear nature, comparable to Ethereum’s GitHub
  • Use blockchain explorers to be sure that transactions within the blockchain of curiosity are seen and clear to customers. Web sites like can be utilized to discover transactions.

Usually, all of the talked about sources needs to be accessible for public blockchain initiatives. If any of those sources is unavailable, the related dangers notably escalate.

Consensus mechanism

A consensus mechanism is a fault-tolerant algorithm utilized in blockchains to attain agreements on a single state of the community amongst distributed processes or multi-agent methods, comparable to cryptocurrencies. Consensus mechanisms in cryptocurrencies are utilized by validating nodes (e.g., miners) to validate and settle for transactions originating from decentralized computing brokers. 4 varieties of consensus mechanisms exist:

  • Proof-Based mostly (Pox): There are two predominant varieties of proof-based algorithms, proof-of-work (PoW) and proof-of-stake (PoS).
    • Proof-of-Work: A decentralized consensus mechanism that requires miners to make use of their computational energy to validate transactions and mine new tokens in a blockchain community. That is achieved by fixing an arbitrary mathematical puzzle that forestalls fraud on the community. Proof-of-work is extensively utilized in cryptocurrency and is mostly a safe technique for validating blockchain transactions. Nonetheless, the safety and reliability of such networks are closely reliant on the computational energy (hash-rate) and decentralization diploma of mining nodes. If the aggregated computation energy of miners is low or extremely centralized, it’s doable that attackers overpower the safety of the community and harm the integrity and reliability of a blockchain by manipulating transactions which may incur important disruptions together with lack of cash.
    •  Proof-of-Stake: Like proof-of-work, mining nodes in proof-of-stake blockchains validate block transactions in a decentralized method. Nonetheless, as a substitute of verifying transactions in proportion to the processing energy a miner holds on this case is relative to the share of the entire cash {that a} miner holds. Though, this improves vitality consumption and lowers mining prices, it poses important safety dangers within the case the place a small variety of mining nodes personal the biggest share of cash in a community or the place the biggest holders collude to govern the blockchain for revenue, comparable to value manipulation or apply insurance policies in a blockchain that may finally profit the foremost stakeholders.
  • DAG: Directed Acyclic Graphs (DAG) is an alternative choice to conventional consensus blockchain mechanisms that goals to enhance pace, scalability and scale back prices. The principle distinction from different blockchains is on the information construction. As a substitute of storing knowledge/transactions on a blockchain and passing this data to all of the nodes within the community, DAG networks can carry out point-to-point transactions with out broadcasting it to the community for verification attributable to their tree-like construction and high-connectivity between nodes. Though DAGs are simpler than legacy blockchains, they’re additionally weak to a number of assaults that may harm the integrity of a community as a result of low quantity of authentications and transactions on the community, together with manipulating nodes within the community, leaving them inclined to numerous conventional networking, and blockchain-specific assaults.
  • PBFT (Sensible Byzantine Fault Tolerance): The principle goal of PBFT algorithms is to resolve whether or not to just accept a bit of knowledge that’s submitted to a blockchain or not. Every node within the community maintains an inner state. When a node receives a transaction, they use the message at the side of their inner state to carry out a computation. This computation will outcome into the choice in regards to the message. The choice is then shared with different nodes within the community. The ultimate resolution is set primarily based on the entire selections from all nodes. In comparison with proof-of-work, a excessive hash price just isn’t required for verification as PBFT depends on the variety of nodes confirming a transaction. As soon as ample responses are reached, the transaction is verified as a sound transaction. Like proof-of-work, PBFT is usually a safe medium for verification solely when ample nodes exist within the community which might be operated by completely different events.

The number of a consensus mechanism Is a fancy job, as every has its benefits and drawbacks by way of safety and reliability. In precept, proof-of-work is safe when a blockchain community is populated with many miners sustaining a excessive hash price for verifications, making it restrictive for adversaries to make use of their very own hash price towards the authentic customers and take over blockchain transactions.

Web sites comparable to can present data on the hash price of varied blockchains. By way of proof-of-stake blockchains, they’ll solely keep their safe operations when there’s a wholesome distribution of the cryptocurrencies or tokens to numerous wallets and customers (the strategy to audit crypto distributions is visited later within the paper). DAG mechanisms are very inclined to man-in-the-middle assaults aiming to govern the integrity and availability of transactions. PBFT mechanisms are typically secure, however inclined to assaults when small variety of nodes function in a blockchain community, permitting potential adversaries to implement assaults that may affect many of the community stakeholders, comparable to Sybil assaults, and make selections for all the community.


This issue evaluates the openness of the staff behind a blockchain, cryptocurrency or token. Whereas blockchain and cryptocurrencies basically assist decentralized and semi-anonymous transactions, the anonymity of the event staff can markedly increase the chance of financial loss attributable to a scarcity of accountability. This anonymity heightens the hazard of fraudulent actions comparable to rug-pulls or value manipulation.

Respected digital foreign money initiatives sometimes disclose their staff’s identities and credentials, offering assurance to customers and buyers in regards to the legitimacy of their venture. It needs to be simple to analysis a crypto venture’s staff. Elevated issue find details about the staff considerably raises the chance related to investing in or adopting the venture. Fundamental analysis on a crypto staff could be performed utilizing the next assets:

  • Social Networks (LinkedIn, X, Instagram, Fb, Reddit, and many others.).
  • YouTube
  • Cryptocurrency-related boards and communities comparable to Bitcointalk and CryptoCompare.
  • Podcasts and interviews with the operators.

It is usually necessary to think about how lengthy the staff has been operational. A shorter operational historical past suggests a better threat. As an illustration, if all social media and YouTube content material associated to the staff have been created inside the previous 5 days, and there’s little proof of great venture growth, this might point out a possible rug-pull situation.


Whitepapers and roadmaps are essential, serving because the bedrock for comprehending, assessing, and partaking in varied crypto initiatives. A whitepaper serves because the foundational doc, providing an in-depth exposition of the venture’s technical underpinnings, its mission, the issue it intends to deal with. It covers the cryptocurrency’s technical features, consensus mechanism, safety features and tokenomics, thus equipping potential buyers and builders with a deeper understanding of the venture. These paperwork are instrumental in fostering transparency, which in flip cultivates belief and credibility — necessities in a sector brimming with innovation and funding prospects. For buyers, whitepapers and roadmaps are essential instruments for evaluating dangers and making selections.

As regulatory scrutiny escalates within the crypto world, whitepapers can signify a venture’s dedication to regulatory compliance, an more and more important issue for long-term viability. A well-crafted whitepaper and roadmap thus empower buyers and customers to make knowledgeable selections, distinguish real initiatives from fraudulent ones, and interact with the crypto group extra responsibly and knowledgeably.

Whitepapers needs to be simply accessible in a venture’s web site, such because the whitepaper for Avalanche. A whitepaper that’s not simply understandable or seems swiftly assembled, a situation now extra believable with generative AI, would possibly point out a doubtful venture.

Supply Code (GitHub)

Checking a cryptocurrency venture’s GitHub repository is significant for a number of causes. It gives perception into the venture’s growth exercise and the competence of its growth staff. By inspecting the frequency and high quality of code commits, pull requests and subject discussions on GitHub, potential buyers and customers can gauge the venture’s dedication to ongoing growth and the staff’s potential to ship on their guarantees. A recurrently up to date and energetic GitHub repository is a constructive signal, indicating that the venture is actively maintained and progressing in direction of its targets.

GitHub additionally offers a stage of transparency and accountability that’s important within the cryptocurrency area. The open nature of GitHub permits anybody to scrutinize the codebase, which may reveal any vulnerabilities or safety points. It additionally permits the group to take part in code evaluations, provide studies and bug fixes, and recommend enhancements. This collaborative method enhances the venture’s safety and reliability. Conversely, initiatives with closed or inactive repositories increase purple flags, as they could be much less clear, or worse, doubtlessly deserted, or fraudulent. Acquiring entry to GitHub repositories needs to be a easy as a google search. The very best the variety of customers interreacting with the code and the longer the time of existence for a venture the very best the arrogance needs to be.

Historic hacks and vulnerabilities

This attribute considers if a blockchain, cryptocurrency or token was compromised or is weak to assaults. It’s regular to seek out {that a} crypto venture has been compromised at a degree of time, nonetheless, the exploitation methodology used for these assaults and weak code needs to be revised to make sure that the supply code is patched and secured. Within the case {that a} venture just isn’t involved with vulnerability administration and finest safety practices, it renders the venture elevated threat attributable to a excessive chance of a future compromise.

To find out if a venture has a historical past of vulnerabilities and threats, a simple method is to seek the advice of information retailers specializing in reporting on these points inside the cryptocurrency sector. A main useful resource for this data is Rekt, overlaying all reported exploitation throughout completely different blockchains and platforms. Extra sources that may additionally show helpful embrace Cointelegraph, CryptoSlate and Substack.

Pockets Distribution

The pockets holder distribution describes the variety of cash or tokens held by every pockets for a particular venture. This metric solely applies for cryptocurrencies or tokens which might be leveraging public or hybrid blockchains the place the transactions are publicly accessible. If a pockets holds a big distribution of a cryptocurrency or token, there’s a important threat for community manipulation.

Such data could be discovered within the respective blockchains of curiosity (e.g., Etherscan for Ethereum) or in cryptocurrency and token value monitoring instruments comparable to CoinMarketCap. It’s necessary to do not forget that, in some circumstances, adversaries could break up their holdings of tokens throughout a number of wallets to offer the looks of decrease token accumulation in a community. It needs to be famous that addresses holding important quantities of cryptocurrencies are sometimes related to exchanges or sensible contracts. It is a typical situation, and these addresses normally shouldn’t be factored into analytical assessments, except there’s cause to consider that an trade or sensible contract deal with is working with malicious intent. Such nuances are essential in precisely decoding the distribution and focus of tokens inside a community.

Governmental and Authorized Scrutiny

The exponential adoption of blockchain has seen extreme scrutiny by governments and regulators across the globe. Such case is the lawsuit from the U.S. Securities and Trade Fee towards Ripple, accusing the defendant of conducting an $1.3 billion unregistered securities providing.

Authorized and governmental scrutiny can considerably improve the dangers of investing and adoption attributable to potential lack of worth. Such losses could be partial or full within the case the place a authorities orders an organization to stop operations (within the case of a centralized crypto venture). To reduce such dangers, adopters and buyers alike should warrant that their crypto venture of curiosity just isn’t a goal of governmental and authorized scrutiny. When vetting a cryptocurrency venture, it’s essential to think about the affect of sure governmental entities and organizations that play a big function in shaping world authorized frameworks and insurance policies for cryptocurrencies. These key entities sometimes set the requirements and rules that affect the crypto business, and consulting their pointers and insurance policies is an important step within the analysis course of. These distinguished our bodies embrace:

One other helpful supply to assist the reader higher perceive the present efforts on cryptocurrency regulation in numerous jurisdictions is the cod3x, crypto council for innovation and Atlantic Council.


Liquidity performs a essential function in assessing the reliability of cryptocurrency and token initiatives. Low liquidity can considerably impede an investor’s potential to commerce, significantly when attempting to exit their place (promote). Moreover, it leaves the crypto venture inclined to cost manipulation, as even a small quantity of capital can drastically have an effect on the value. This surroundings is ripe for schemes like pump-and-dump or rug-pulls. Excessive liquidity, conversely, makes value manipulation more difficult, requiring substantial capital to affect the market meaningfully.

Nonetheless, it’s value noting that low liquidity doesn’t all the time signify a scarcity of potential. Whereas it typically factors to a newly conceived venture missing substantial backing, some main crypto initiatives started with restricted liquidity and organically grew over time. Subsequently, liquidity needs to be thought-about alongside different venture options for a extra complete analysis.

To evaluate the liquidity of a crypto venture, CoinMarketCap is a great tool. Key metrics to concentrate on embrace the absolutely diluted market cap, which displays the entire worth of the cryptocurrency if all cash have been in circulation, and the circulating provide, indicating the at the moment accessible cash available in the market. Extraordinarily low values in both metric might pose important dangers. Moreover, if the circulating provide is a small fraction of the absolutely diluted market cap, it could point out potential threat, as massive releases of cash into circulation might result in substantial value fluctuations and manipulation. Such particulars are sometimes outlined in a venture’s whitepaper and web site and needs to be rigorously reviewed.

Auditing Use Instances

To raised show the usage of the proposed auditing methodology and the necessity for due diligence in evaluating crypto initiatives, we’ll apply this framework to 3 hypothetical examples of cryptocurrencies and tokens. These circumstances will concentrate on public blockchains, as personal or hybrid blockchains typically perform as “black packing containers.” In such blockchains, there’s restricted transparency relating to their inner workings, thus requiring a better diploma of belief.

Token “X” Coin “Y” Coin “Z”
Blockchain Sort Public Public Public
Consensus Mechanism Proof-of-Work (excessive hash price) Proof-of-Stake (low distribution) Proof-of-Work (low hash price)
Group Unknown Identified Identified
Whitepaper Sure – Low high quality, rushed, restricted worth Sure – good high quality Sure – good high quality
Supply Code

(Git hub)

Sure – Venture created 10 days in the past with solely two accounts linked to the venture Sure – greater than 1,000 energetic customers and builders Sure – greater than 500 customers and builders
Historic hacks & Bugs No Sure – however vulnerabilities mounted Sure – 51% assaults
Pockets Distribution 80% belongs to 2 personal pockets addresses 40% belongs to a personal pockets deal with Wholesome distribution, first 40 addresses maintain 11% of crypto
Governmental and Authorized Scrutiny N/A N/A N/A
Liquidity $90,000 $ 6,000,000 $ 100,000,000
  • The staff is unknown.
  • Whitepaper exhibits no innovation and no substance.
  •  Restricted monetary backing.
  • GitHub web page exists for simply two weeks with little following.
  • Majority of the tokens are distributed in simply two addresses, owned by the creators.


A high-risk funding that may be inclined to cost manipulation or a rug-pull.

  • Low liquidity mixed with a consensus mechanism tied to stake possession can permit risk actors to realize management over the community with a comparatively small funding.





The venture seems dependable and promising, but its low liquidity poses a threat to the safety of its consensus mechanism.

  • The community stays weak to assaults attributable to its historical past of 51% hacks and ongoing low hash price, with earlier problems with adversaries overpowering the community not but resolved.





The venture seems to be dependable; nonetheless, 51% assaults are nonetheless doable that may result in lack of cryptocurrency.


The fast enlargement of blockchain know-how has garnered consideration and concern from governments attributable to its decentralized nature and regulatory challenges. There may be nonetheless a necessity for firms to pay attention to the dangers posed by these applied sciences, together with the specter of scams and distinctive blockchain vulnerabilities. We hope this put up serves as a information for secure adoption and funding, stressing the significance {of professional} recommendation for monetary selections. The intention is to coach a large viewers on navigating the advanced panorama of blockchain know-how safely and responsibly. All the time search knowledgeable steering, keep up to date with the most recent developments, and prioritize safety in your blockchain endeavors.

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Hector Antonio Guzman German

Graduado de Doctor en medicina en la universidad Autónoma de Santo Domingo en el año 2004. Luego emigró a la República Federal de Alemania, dónde se ha formado en medicina interna, cardiologia, Emergenciologia, medicina de buceo y cuidados intensivos.

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