When it comes to cryptocurrency, there are many variables that should be considered when you determine whether you want to invest in a particular coin or token. Chiefly, the layers of security which are embedded into a particular cryptocurrency.
The nature of cryptocurrency security is such that if there is an issue with the first layer in a coin protocol, then the second and third layers are essentially useless as it’s already compromised.
To better understand this, you need to know more about each layer of security.
The first form of security for a cryptocurrency is its protocol. If the protocol is flawed, someone will eventually discover these issues and exploit them, thus putting the entire network at risk. This is regardless of what wallet or exchange you’re holding — having the coins in your possession will be enough for you to be at risk. At this level, there are two types of currencies, those being coins and ICO-issued tokens. These differ in their technical specifications, as in the coins are either independent network protocols or forks (copies) of several of them.
To determine if a cryptocurrency protocol is secure, you need to know whether or not it can be centralized. This is the case with bitcoin, with it now being centralized around a few of the largest mining pools. Therefore, if the pools work together, they may have the power to compromise the whole network. The solution to this is to ensure that with proof-of-stake cryptocurrencies no single stakeholder has a large enough stake to compromise consensus and thus the network.
The next layer of cryptocurrency security are the various exchanges. These have unique code and infrastructure security which is separate from blockchain. That makes an exchange very similar to a centralized data center or cloud service. The result of this is that exchanges are more vulnerable to hacking than a decentralized service built on blockchain.
The final layer of security relating to cryptocurrency is the wallet you use. When selecting a wallet, you have two options:
Hot wallet (as in a website-based wallet or an account on an exchange)
Cold wallet (hardware, software or even paper)
Key differences include that when using a hot wallet, your tokens and coins are under the control of whoever provides you with the wallet, rather than you. An account on a crypto exchange which can be accessed via protocols that may not even be within the blockchain system.
In summarizing what all this means for cryptocurrency, the conclusion is simply that security becomes compromised when any component isn’t based on blockchain or the principles of decentralization aren’t observed. For anyone wanting to invest in cryptocurrency, these considerations are critical to keeping your coins safe, and so you you need to examine each layer of security from coins to wallets individually to determine whether or not they are truly secure.
