The Three Layers Of Cryptocurrency Security
Post written by
CEO of Wallarm, a YCombinator-backed AI security startup.
The cryptocurrency marathon started in 2009 from the initial release of Bitcoin — the first decentralized cryptocurrency. By definition, a decentralized system operates with no servers and each participant is allowed execute transactions. In the case of the blockchain, each participant also has to perform some system tasks like storing transactional data. A group of participants can even run an alternative version of reality called a fork. This fork would work by the same rules as the original decentralized system but would have a different state.
This diagram illustrates the hierarchical nature of cryptocurrency security:
The bottom line is, if there is an issue at the first layer in a coin protocol, you will be compromised, regardless of how secure are your second and third layers are.
Let’s look into each of the layers separately.
The First Layer: Coins And Tokens
Your security in the world of cryptocurrencies is, first and foremost, based the security of the protocol. When you are choosing a cryptocurrency you are taking on all the risks related to the protocol. If somebody can identify and exploit protocol flaws, they will compromise the entire network, including you, and it will not matter which exchange or wallet you are using.
At this layer there are two different types of currencies:
• The coins themselves (Bitcoin, Bitcoin Cash/Gold, Ethereum, NEO, etc.)
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