Review of Blockchain Security in Q1 2023
The crypto market witnessed an up-trending market through Q1 2023. Attacks against the crypto ecosystem were still active. Crypto assets worth around US$261.3 million were exploited from January 2023 to March 2023.
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Fairyproof studied 113 publicly reported security incidents that occurred in Q1 2023. This report is composed of findings, analysis and best practices of these incidents.
Before proceeding, the following terms and technologies are introduced in this report:
CCBS stands for “Centralized Crypto or Blockchain Service”. A CCBS refers to a platform or service that provides crypto or blockchain related products or services, and is run by a conventional / centralized organization, entity or company such as conventional crypto exchanges (eg. Binance or Tether).
Flash loans are a popular feature that hackers utilize when attacking EVM-Compatible smart contracts. Flash loans were developed by the team behind the famous DeFi application AAVE . This feature “allows users to borrow any available amount of assets without putting up any collateral, as long as the liquidity is returned to the protocol within one block transaction” . Flash loans are quite often used to borrow ERC-20 tokens  and attack DeFi applications. To initiate a flash loan, users will need to write a contract that borrows an available amount of assets and pay back the loan + interest + necessary fees all within the same transaction.
A cross-chain bridge is an infrastructure that connects multiple independent blockchains and enables an exchange of cryptos, data or information from one blockchain to another.
As more blockchains have their own ecosystems, cryptos and dApps, the need for exchanging cryptos or data across different blockchains becomes increasingly high while the volume of cross-chain transactions dramatically increase. This causes cross-chain bridges to suffer more attacks.
FOCUS OF THIS REPORT
In this report we list our statistics collected from typical security incidents that happened in the blockchain industry in Q1 2023, give an in-depth analysis of their root causes, and present our recommended best practices.
STATISTICS AND ANALYSIS OF SECURITY INCIDENTS OF Q1 2023
We studied 113 publicly reported security incidents that occurred in Q1 2023 and present our statistics and analysis based on the targets and root causes.
In Q1, 2023 the total value of the exploited assets was US $261.3 million and the overall market cap of the cryptocurrency according to Trading view was US $1137 billion. The value of the exploited assets accounted for 0.02% of the total market cap of the cryptocurrency.
INCIDENTS CATEGORIZED BY TARGETS
Our researched incidents can be categorized into four types of targets:
4. Cross-chain Bridges
A CCBS-related incident is one in which a centralized crypto or blockchain service platform is attacked by hackers resulting in the failure of its services or a loss of crypto assets under its custody.
A blockchain-related incident is one where a blockchain mainnet, side chain or layer 2 is attacked by malicious actors from inside, outside, or both, resulting in its operation going out of order, or that a blockchain fails to work properly due to issues related to software, hardware, or both. Attackers will then be able to exploit the consensus for profits.
A dApp-related incident is one where a dApp’s daily operation goes out-of-order or is attacked, leaving it open for attackers to exploit users and crypto assets under the custody of the dApp.
A cross-chain bridge-related incident occurs when a cross-chain bridge is attacked resulting in a loss of crypto assets under its custody or a failure of the exchange function between multiple blockchains.
There were 113 incidents in total. Here is a figure that shows the percentage for each of these targets respectively.
The number of dApp-related incidents account for more than 91.15% of the total incidents. Out of 113 incidents, 4 were CCBS-related, 6 were blockchain-related, and 103 were dApp-related. There were no cross-chain bridge incidents.
Incidents that had occurred in blockchains can be further categorized into three sub-categories:
i. Blockchain mainnets
ii. Side chains
iii. Layer 2 solutions
A blockchain mainnet, also known as layer 1, is an independent blockchain that has its own network with its own protocol, consensus, and validators. A blockchain mainnet can validate transactions, data, and blocks generated in its network by its own validators and reach a finality. Bitcoin and Ethereum are typical blockchain mainnets.
A side chain is a separate, independent blockchain which runs in parallel to a blockchain mainnet. It has its own network consensus and validators. It is connected to a blockchain mainnet (eg. by a two-way peg ).
A layer 2 solution refers to a protocol or network that relies on a blockchain as its base layer (layer 1) for security and finality . Its main purpose is to solve scalability issues of its base layer. It processes transactions faster and costs less resources compared to its base layer. Since 2021, there has been a huge surge in the growth and development of layer 2 solutions for the Ethereum ecosystem.
Both side chains and layer 2 solutions exist to solve the scalability issues of a blockchain mainnet. The significant difference between a side chain and a layer 2 solution is that a side chain does not necessarily rely on its blockchain mainnet for security or finality whereas a layer 2 solution does.
There were 6 blockchain-related incidents in total in Q1 2023. The figure below shows the percentages of blockchain mainnet related incidents, side-chain related incidents, and layer 2 related incidents respectively.
The number of blockchain mainnet related incidents and layer 2 related incidents account for 66.67% (4) and 33.33% (2) of the total incidents respectively. No prominent side-chain related incidents were covered in our statistics. The layer 2 solutions that were attacked were Arbitrum  and Boba , while the attacked blockchain mainnets were Kaspa , Theta, Hedera and GDS Chain.
DAPP RELATED INCIDENTS
Among the 103 incidents that occurred toward dApps, 4 were rug-pulls, 4 were involved in exploitations and 95 were directly attacked. An attack against a dApp can specifically target its front-end, server side, or smart contract(s). We can therefore further classify these 41 incidents into three sub-categories:
i. dApp’s front-end
ii. dApp’s server side
iii. dApp’s smart contract(s)
dApp’s front-end related incidents refer
s to events where vulnerabilities from the conventional client side are exploited, compromising on the account information and personal details of users which can be used to steal their crypto assets.
dApp’s server side related incidents are those where vulnerabilities present in the conventional server side are exploited, leaving on-chain and off-chain communication open for hijacking and crypto assets of users open for exploitation.
Smart contract related incidents refer to vulnerabilities in a smart contract’s design or implementation, which are leveraged to exploit crypto assets from users.
Here is a figure that shows the percentages of front-end, server-side and smart contract related incidents respectively.
The above figure shows the number of smart contract related incidents, server side related incidents, and front-end related incidents, accounting for 38.95%, 0%, and 61.05% of the total incidents respectively. Among 95 incidents, 58 was front-end related and 37 were smart contract related.
We further studied the amount of loss incurred from these sub-categories. Our study showed that the amount of loss in server-side related incidents was 0, and the amount of losses in smart contract related incidents and front-end related incidents were US $237.97 million and US $19.87 million respectively. And they accounted for 92.29% and 7.71% of the total loss respectively.
It is clear that smart contract related incidents were the biggest issue. Typical vulnerabilities we found pertaining to smart contracts in Q1 2023 include logic vulnerabilities, private key leaks, flash loans, re-entrancy attacks, and more.
We studied the 37 incidents in which smart contracts were directly attacked and derived the following figure based on vulnerability types:
The figure shows that the number of incidents with the highest percentages were flashloans and logic vulnerabilities. Logic vulnerabilities mainly include missing validations for parameters, missing validation for access control, improper logic etc. 11 projects suffered from flashloan attacks and 11 suffered from logic vulnerability attacks as well.
The following figure illustrates the amount of loss for each vulnerability type:
It is interesting to note that although the number of incidents that suffered from flash loans were the most, the amount of loss it caused only ranked third. 11 incidents were caused by flash loans, totaling a loss of US $9.41 million. The rank comes from 11 incidents caused by logic vulnerabilities totaling a loss of US $200.3 million, accounting for 84.17% of the total loss.
INCIDENTS CATEGORIZED BY ROOT CAUSES
The root cause of these incidents can be categorized into the following:
i. Attacks from hackers
We studied these incidents and got the following figure.
The above figure shows that the number of attacks from hackers and rug-pulls incidents accounted for 96.46% (109) and 3.54% (4) of the total incidents respectively.
We studied the amount of loss of each category of incidents based on the root cause and got the following figure:
The above figure shows that the amount of loss in the incidents that suffered from attacks and the amount of loss in rug-pull incidents each accounted for 98.85% and 1.15% of the total loss respectively. The amount of loss in the incidents that suffered from attacks was US $258.3 million and the amount of loss in rug-pull incidents was US $3 million. This reveals that attacks from hackers posed the largest threat to the whole crypto ecosystem in Q1 2023.
ATTACKS FROM HACKERS
We studied the targets the hackers attacked and got the following figure:
The figure above shows that the number of attacks on dApps, blockchains and CCBSs accounted for 90.83% (99), 5.5% (6) and 3.67% (4) respectively.
After we studied the amount of loss in each of them we got the following figure:
The amount of loss in attacks on dApps and CCBSs were 99.93% and 0.07%, resulting in a loss of US $258.11 million and US $0.19 million respectively.
All rug-pulls that happened in Q1 2023 were against dApps. There were 4 incidents totaling a loss of US $3 million which were not as severe as losses caused by attacks.
DApps were the most prominent target for attacks in Q1 2023. The number of attacked dApps incidents accounted for 90.83% of the total incidents and the amount of loss in attacked dApps accounted for 99.93% of the total loss. Among all the attacked dApp incidents the biggest one was the attack on Euler Finance.
Hackers still proved to remain as the main threat to the crypto industry, accounting for 96.46% of all the number of incidents. It far surpassed any other root causes such as rug-pulls, etc.
A dApp consists of three parts: a front-end, a server-side and smart contracts. Either one or multiple parts are targeted during dApp attacks. According to our statistics, attacks on front-ends accounted for an extraordinarily higher percentage of attacks compared to the smart contracts and server sides with regard to attack frequencies. However the amount of loss in attacks on smart contracts far surpassed that of the attacks on front-ends. This shows that attacks on smart contracts still posed as the biggest threat to dApps and security solutions for smart contracts are the most needed in the crypto landscape with regard to security.
All rug-pulls in Q1 2023 were dApps.
Finally, for smart contract related incidents, we found the number of attack sub-categories (except the misc incidents) to be ranked as the following:
Rank 1: Flashloan and logic vulnerability
Rank 2: Price manipulation and re-entrancy attacks
In contrast, the amount of loss in the incidents that suffered from logic vulnerabilities far surpassed any one of these ranks.
The biggest incident in Q1 2023 was the attack on Euler Finance. The vulnerability was not easy to be detected. This reveals that as DeFi applications evolve more complex logic is implemented and more possible bugs would be introduced. It is a big challenge to security companies. Smart contract audits are a must-have step to ensure a project’s security but obviously not enough in today’s crypto space. Solutions that can cover a project’s real-time issues and vulnerabilities after it is deployed should raise big awareness.
BEST PRACTICES TO PREVENT SECURITY ISSUES
In this section we present some best practices to help both blockchain developers and users manage the risks posed by the incidents that happened in Q1 2023, and support coordinated and efficient response to crypto security incidents. We would recommend both blockchain developers and users to apply these practices to the greatest extent possible based on the availability of their resources.
Note: “Blockchain developers” refers to both developers of blockchains and developers of dApps, and blockchains or systems pertaining to crypto currencies. Here, “blockchain users” refer to everyone that participates in activities pertaining to crypto system’s management, operation, trading, etc.
FOR BLOCKCHAIN DEVELOPERS
Awareness of security for layer 2 solutions should still be kept even though attacks on them were few with negligible losses as more layer 2 solutions will emerge in the coming years. Research and development for solutions to tackle security challenges in this area must be prompt.
A step to transfer an admin’s access control to a multi-sig wallet or a DAO to manage access control to crypto assets or critical operations is a must-have.
Attackers would employ flash loans to maximize their exploits when they detect vulnerabilities in smart contracts, including issues of re-entrancy, missing validations for access control, incorrect token price algorithm, and more. Proper handling of these issues should have the highest priority for a smart contract developer when designing and coding a smart contract.
Our statistics show that an increasing number of hackers have been using social media tools – especially Discord – to launch phishing attacks. This persisted through 2022 and Q1 2023 and will very likely persist in 2023. Many users have suffered huge losses. Project developers and managers are advised to prioritize safely and securely managing social media accounts and finding security solutions for them on top of project implementation.
FOR BLOCKCHAIN USERS
More users are varying their crypto portfolio across different blockchains. The demand for cross-chain transactions is rapidly increasing. Whenever a user participates in a cross-chain transaction, the user will have to interact with a cross-chain bridge – a popular target among hackers. Hence, before starting a cross-chain transaction, users are advised to investigate the bridge’s security condition and ensure they use a reliable, safe and secure bridge.
While it is necessary to pay great attention to the security for smart contracts when interacting with a dApp, the importance to also pay attention to the security of the user interface while exercising caution to detect suspicious messages, prompts, and behavior presented by the UI is increasing.
We strongly urge users to check whether a project has audit reports and read these reports before proceeding with further actions.
Use a cold wallet or a mutli-signature wallet where possible to manage crypto assets that are not for frequent trading. Be careful about using a hot wallet and make sure the hardware in which a hot wallet is installed is safe and secure.
Be cautious of a dApp where its team members are unknown or lack reputation. Such dApps may eventually be rug-pull projects. Be cautious of a centralized exchange which has not established a reputation or does not have tracked transaction data on third party media as it may also eventually prove to be rug-pull projects.
To stay updated on notable security incidents in the world of Web3.0
 Aave. https://aave.com/
 Flash-loans.. https://aave.com/flash-loans/
 ERC-20 TOKEN STANDARD. https://ethereum.org/en/developers/docs/standards/tokens/erc-20/
 Sidechains. https://ethereum.org/en/developers/docs/scaling/sidechains/
 Layer-2. https://academy.binance.com/en/glossary/layer-2
 Arbitrum. https://arbitrum.io/
 Boba. https://boba.network/
 Kaspa. https://kaspa.org/
 Theta. https://www.thetatoken.org/
 Hedera. https://hedera.com/
 GDS Chain. https://twitter.com/GDS_chain
 Euler Finance. https://www.euler.finance/