Building Trust & Security in the Crypto Ecosystem

5 min read

The crypto space is plagued by issues such as loss of private keys, theft, and counterparty risk.

Cryptocurrency enthusiasts strongly believe that the trustless and decentralized nature of the ecosystem is its most significant advantage. By empowering individuals to self-custody, cryptocurrencies provide a way for people to take control of their finances. However, these same features have created hurdles for widespread adoption. It has been reported that up to 20% of the Bitcoins in circulation are "lost," and other blockchains may face similar challenges.

There's a mantra of NYKNYC (Not Your Keys, Not Your Coins/Crypto) that is often repeated in the crypto space. The cryptocurrency space is plagued by issues such as loss of private keys, theft, and counterparty risk. Addressing these concerns and improving the DeFi experience for all users is critical for driving the growth of the industry.

Security Matters for Users and Exchanges#

It is critical for everyone involved with cryptocurrency, especially users of CeFi and DeFi, to prioritize security. One key way to improve security is by encouraging users to self-custody their coins. This means withdrawing tokens from exchanges and keeping them in a personal wallet, which is protected by private keys. By doing this, users can avoid losing funds if the exchange is hacked or goes bankrupt.

However, for those who are actively trading or yield farming on a DeFi platform, transferring funds is necessary. To ensure the platform is secure, it is crucial for the project in question to have undergone code audits, including smart contract and front-end audits, penetration testing, and ongoing bug-bounty programs.  To reassure traders and investors that the platform is secure and to minimize the risk of a security breach, the platform should, as a minimum, share the results of:

  • Smart contract audits
  • Front-end audits
  • Penetration testing
  • Ongoing bug-bounty programs

It is essential for all employees working in cryptocurrency CeFi and DeFi exchanges and platforms to be educated on social engineering attacks and good cybersecurity hygiene. Regular training sessions and security audits can help reduce the risk of these platforms being compromised. Similarly, end-users should also be aware of good cybersecurity practices to protect their self-custody funds and CeFi exchange accounts. Simple precautions such as enabling multi-factor authentication, avoiding password reuse, and using a Virtual Private Network (VPN) can help investors mitigate the risk of their  self-custody funds, or CeFi exchange accounts being compromised.

Simple Steps to Reduce Your Risk When Investing in DeFi#

Another much-loved acronym in the cryptocurrency space is DYOR (Do Your Own Research). Performing due diligence is a crucial aspect of navigating the crypto space. Before choosing a platform to use or invest in, it's important to conduct thorough research to assess the level of risk involved. Some key factors to consider includes the following:

  • Transparency about the platform's origin (location, leadership team etc)
  • Their level of experience, 
  • Whether or not the platform has submitted themselves to audits. 
  • Proof of reserves,

Many crypto companies don't provide such information, and even when they do, it's hard to be sure how accurate the information is. Proof of reserves, for example, is only useful if the proof comes from a credible source, such as an independent audit firm. Self-proclaimed proofs are of very little value. In addition, proof of reserves is not a useful metric if it isn't also accompanied by verifiable proof of liabilities.

Another strategy for risk management in the decentralized finance (DeFi) space is to consider the use of DeFi insurance. However, it's important for investors to understand the nuances of different insurance options, such as the differences between discretionary and parametric insurance, to ensure that any claims will be processed quickly and that the investor is likely to receive a payout.

Ultimately, the responsibility for mitigating risks in the crypto space lies with the investor. By taking the time to educate themselves and make informed decisions, investors can help ensure their financial security in a rapidly evolving and often unpredictable market.

Why Cefi Trusts DeFi to Protect Cefi#

CeFi projects have a responsibility to their users, and DeFi can help CeFi projects protect their community's funds by giving CeFi exchanges a way to maintain investor protection funds "at arms-length" while earning a return on the liquidity they provide.

Investing in DeFi insurance is a win-win for CeFi projects. Parametric cover adds credibility to CeFi projects and gives users a lot more confidence in the platform. It takes a long time and consistent effort for CeFi projects to gain credibility, especially after the high-profile collapse of FTX, and other exchanges before that. Even small incidents or data breaches can be hugely damaging to a brand's reputation, and in a space with such a vocal community of enthusiasts and vocal detractors too, CeFi companies have to do everything they can to protect their reputations.

Using a DeFi insurance pool, especially one that offers parametric cover, is a good choice for CeFi exchanges because the decision to pay out funds to users in the event of an incident is independent of the CeFi exchange. This removes the risk of accusations of dishonesty or corruption and makes incident resolution more likely to go smoothly.

In the Neptune Mutual marketplace, cover policies are available for a number of projects from within two diversified cover pools. In addition, cover can be purchased for certain CeFi exchanges such as Binance and OKX from the respective dedicated cover pool; these cover pools give CeFi users the opportunity to purchase parametric cover to mitigate security and custody risk on their chosen platform. It also provides the opportunity for CeFi users to provide stablecoin liquidity to CeFi dedicated cover pools in order to earn stablecoin returns.

If you're involved with a CeFi or DeFi project and you'd like to know more about our parametric insurance pools and the rewards we offer to liquidity providers, contact us today to discuss your options.