How Can Exchanges Protect User Funds from Hacking Attacks?

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Cryptocurrency exchanges are known to be central hubs for selling, buying and trading digital assets. With the growing cryptocurrency market these exchanges are also becoming frequent targets for scammers and hackers as the user funds hold a lot of value. In the past there were many high-profile hacking incidents that cost people millions of dollars and also raised concerns about crypto exchanges’ security. To protect users and maintain market trust, exchanges have implemented and developed several measures to protect against hacking attacks and secure funds. In this article we will discuss some effective methods for cryptocurrency exchanges to mitigate hacking risk and safeguard user funds.

Hot Wallets

Cryptocurrency exchanges should maintain hot wallets for daily operations like deposits and withdrawals and to protect these hot wallets cryptocurrency exchanges should implement strict security measures. A hot wallet is a cryptocurrency wallet that is connected to the internet and allow frequent and quick transactions. Hot wallets offer users with convenience but they are also very vulnerable to hacking due to their online presence

Advanced encryption methods are usually used by the exchanges for protecting hot wallets from unauthorized access. Encrypted transaction data and private keys hinder any hacking interceptions and saves sensitive information from manipulation.

Multiple cryptocurrency exchanges also deploy firewalls and other intrusion detection systems in order to monitor outgoing and incoming traffic to identify any abnormal activity. These systems can easily flag unauthorized access attempts by stopping suspected hacking attempts.

Automatic attacks like DDoS or distributed denial of service or brute force logging attempts are prevented by using rate limiting. This feature helps to limit the number of request an IP address or a user can make in a specific timeframe. This helps preventing forced entries and overloading.

Few exchanges also sweep their hot wallets and transfer the funds to some cold storage when the balance exceeds are predefined threshold. This way they limit the amount of crypto assets that remain vulnerable in any hot wallet.

Cold Storage

It is the most effective way in which an exchange can protect its user funds. This refers to storing cryptocurrencies in an offline wallet. These wallets are not connected to the internet and hence they are less vulnerable to cyber-attacks.

A cold storage is a practice to store a large amount of an exchange’s assets in an offline wallet. It could be a hardware wallet (like physical device), a specialized vault to store cryptocurrencies in a very secure environment or a paper violet like printed private keys. Cold wallets are offline and are saved from a lot of attacks like phishing attack, malware and hacking. This way a large-scale theft can be prevented. Many cryptocurrency exchanges store more than 95% of their user funds in any cold storage and only keep a small portion of their assets in hot wallets that also for daily transactions.

To secure a cold wallet, you can use a multi signature technology which means that you need multiple private keys to authorize a transaction by adding an extra security layer.

Some of the very famous exchanges also distribute its cold storages across multiple geographical locations. They use secured wallets in different countries to mitigate the chances of physical theft, natural disasters, or fire that can affect all funds at once.

Two Factor Authentication

2FA or two factor authentication is the most effective measures to protect user accounts from hacker attacks. In this way a user is required to give two forms of identification to access their account or perform any action like withdrawing funds.

A typical 2FA requires a user to enter their password along with another form of authentication like a code generated by any app like Google authenticator. In this way hackers cannot access your account even after obtaining your password.

Multiple exchanges now use a time-based one-time password that usually expires within 30 seconds. This adds another protective layer even after the code is compromised.

Exchanges also use SMS based 2FA but it is vulnerable to The SIM swapping attacks. On the other hand, app-based 2FA is more secure that is why it is recommended by many crypto exchanges.

Cryptocurrency exchange also required 2FA for important actions like changing account settings, withdrawals, or even logging in from a new device.

Conclusion

Cryptocurrency exchanges are main targets for the hackers but using advanced security measures and other best practices can reduce the risk of these attacks. Solutions like hot wallets, cold wallets and two factor authentication are few of the main strategies that exchanges can use to protect user funds. But after all these measures user awareness and other regulatory compliance are very important in order to save user funds. With ever-evolving cryptocurrency industry crypto exchanges should stay ahead to cope up with emerging threats.

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