The Challenge of Secure Crypto in a World of Hype

Meme coins, fueled by social media buzz and community enthusiasm rather than inherent utility, have become a defining trend within the crypto market. They offer the potential for outsized returns but come with equally high risks of sudden crashes. BNB Chain, the blockchain network created by Binance, is hoping to attract some of this attention and investment activity to its network.

BNB Chain is embracing the meme coin frenzy with its newly launched "Meme Innovation Battle." This competition challenges developers to create the most popular meme tokens on the chain, with a potential reward pool of up to $1 million. The competition's rules emphasize community hype as the key metric for success. Winning meme coins will be chosen based on trading volume, the number of unique token holders, and market capitalization. The total prize pool scales depending on overall volume: if all participating coins collectively reach $30 billion in trading, the full $1 million will be awarded.

The initiative raises the question of whether even substantial financial incentives can truly spark the organic virality that often makes or breaks meme coins. Some industry commentators remain skeptical, arguing that you can't "buy" genuine community-driven hype. However, Ethereum co-founder Vitalik Buterin, while condemning some isolated racist and sexist memecoins that emerged recently, recognizes the mass adoption value that memecoins can leverage. As adoption grows, so too does the widespread vulnerability of ERC-20 tokens to phishing scams. Therefore, Buterin advocates for ethically positive crypto projects – including memecoins – that prioritize enhanced token security.

ERC-20 tokens, the backbone of countless Ethereum-based projects, have revolutionized crypto. Yet, they are plagued by security risks. Given their dominance, ERC-20 tokens accounted for 89.5% of the $71.5 million stolen in crypto phishing scams in March 2023 alone. Attackers frequently manipulate "approve" and "increaseAllowance" functions within the standard, deceiving users into granting permission for fraudulent transactions. This is one of the main challenges of self-custody in crypto, where the safeguarding of funds is entirely delegated to the funds owner. As the Web3 user experience becomes more streamlined, scammers and hackers are always ready to capitalize on any remaining vulnerabilities.

Attempts to improve usability, such as Uniswap's Permit2, have sometimes backfired. While designed to streamline token approvals, Permit2 has been exploited by scammers, as demonstrated by researcher Roman Rakhlin. Uniswap's Permit2 extended off-chain token approvals (EIP-2612) to all ERC-20 tokens, aiming to improve transactions on the platform. However, this well-intentioned update created unforeseen vulnerabilities.

Smart contracts, once deployed, are immutable – a double-edged sword in the crypto world. This complicates efforts to fix issues in the original ERC-20 standard. Some functions have been phased out, and technical workarounds exist, but core vulnerabilities persist. The "increaseAllowance" function, introduced to address an earlier "approve" vulnerability, was itself removed from the ERC-20 standard due to its own risks. But due to blockchain's immutability, neither this change nor the creation of Permit2 can fix the vulnerabilities present in existing tokens.

Often the success of scams lies in social engineering – the exploitation of human psychology. This isn't unique to crypto, of course. I nearly fell for one of them last week. I opened a bank account in a new bank but forgot to upload my documents to pass the know-your-customer (KYC) requirements. Then someone – who knew that I had just received my bank card – called, claiming my account was blocked and I needed to upload my documents. Given what he knew, it was easy to trust that he worked for the bank. He even sent me his ID card over WhatsApp to convince me. But he pushed too far when he asked me to send him a picture of my bank card.

Phishing tactics continue to evolve in crypto too, catching even experienced crypto veterans off guard, such as Necksus, a crypto miner and collaborator with Intelligence On Chain. The co-founder of the DeFi platform Pickle Finance, who operates under the pseudonyms “Larry the Cucumber” and “Beary the Cucumber,” was also recently targeted. A new trend sees scammers sending fake renewal notices to Ethereum Name Service (ENS) domain owners.

While technical problems must be addressed, user behavior is also key. Improved communication from wallets, vigilance when signing transactions, and using security tools like WalletGuard that scan URLs are all essential. Efforts to develop better token approval methods are ongoing, though fundamental ERC-20 problems may always exist. Buterin, in one of his rare interviews, envisions a crypto space populated by ethically sound projects with elements of entertainment. Ideas like "charity coins" that donate portions of their supply or create fee mechanisms to support specific charities while still providing a fun element, or games that blend entertainment with support for lower-income players, potentially inspired by concepts like World of Warcraft rather than simple "Candy Crush" clones on the blockchain, could pave the way.

Buterin also addressed Ethereum's ongoing development. Following the Dencun hard fork, he believes Ethereum has solved its fundamental scaling problems. The network is transitioning from a "zero-to-one" to a "one-to-N" scaling model, with developers now focusing on further enhancing the network's capabilities.

Ethereum nodes shoulder the burden of storing the entire blockchain, limiting how much the network can grow. Data Availability Sampling (DAS) aims to distribute this responsibility while ensuring critical data is still accessible when needed. PeerDAS is a proposed system where nodes store only portions of blockchain data instead of the whole thing. To keep everyone honest, it introduces clever checks and balances, allowing other nodes to "sample" a node's data to make sure it's available. By distributing responsibility and minimizing what each node stores, DAS enables more nodes to join, leading to better scaling.

Ethereum's core layer (layer-1) is excellent for security but was never meant for huge transaction volume. Layer-2 solutions build "on top," inheriting Ethereum's security while handling transactions more efficiently. Here's a sample of how they're being refined:

- Data Compression:?Imagine squeezing files into a zip folder before sending. Similarly, data compression makes transactions smaller, allowing more to fit into each block and lowering fees.

- Plasma Solutions:?These create mini-blockchains connected to the main Ethereum chain, similar to adding side roads to ease traffic. This allows many transactions to happen off-chain with only essential info settled on the main network, resulting in greater throughput.

- Stricter Standards:?Think of these as tough building codes for layer-2s. Increased focus on security and code reliability prevents faulty smart contracts from compromising funds, creating a safer and more robust financial ecosystem on top of Ethereum.

Building a more secure and conscientious crypto world will take a collaborative effort. Developers, wallet providers, security specialists, and vigilant users all have a role to play. This is a challenge Vitalik Buterin believes the community must embrace for the future health and long-term success of cryptocurrency.

Ethereum restaking could become a foundation for a diverse range of new decentralized applications, but analysts at Coinbase warn that it also introduces potential risks. A recent research report delves into both the benefits and complexities of EigenLayer's restaking model. EigenLayer's launch sparked excitement, momentarily surpassing Aave as the second-largest DeFi protocol. However, the potential for leverage creation has raised concerns among Ethereum developers. Restaking advocates, on the other hand, champion its ability to unlock further rewards for ETH stakers.

EigenLayer allows users to earn additional rewards by securing network services using derivative tokens received through liquid staking protocols like Lido. This restaking process initially offers clear benefits but also has a unique feature: staked tokens can be re-staked to other validators. This can increase yield but also potentially compound risk by allocating funds to similar providers.

Liquid Restaked Tokens (LRTs), the tokens earned through restaking on EigenLayer, could incentivize users to choose high-yield providers. The problem is that these high yields often come with equally high risks. By concentrating funds with a select few providers, often those taking on greater risk to achieve those returns, the system becomes more vulnerable to single points of failure.

Additionally, EigenLayer's restaking model allows users to stake and then re-stake their assets multiple times. While this seems to multiply potential rewards, it also has a dangerous side effect. Each round of re-staking compounds the exposure to the chosen validators, creating a false sense of security as the true risk profile of the entire investment grows increasingly opaque and difficult to assess.

Lastly, LRT issuers and the Decentralized Autonomous Organizations (DAOs) that often govern them will naturally want to attract users. This pressure to remain competitive could push LRT providers and DAOs towards progressively riskier strategies to boost their yields and stay ahead, ultimately undermining the long-term health of the entire restaking ecosystem.

Disclaimer: The information provided in this article should not be considered financial advice. The cryptocurrency market remains dynamic and carries risks. It's essential to conduct your own thorough research and consult with qualified professionals before making any investment decisions.