How Blockchains Get Attacked and How Bitcoin Got Hacked, Part II

	Author:	“Bitcoin” Hare
	Job Title:	Blockchain Developer
	Hobbies:	Blockchains, More Blockchains, Even More Blockchains

This is the second part of Chapter 10 from the book “The Ins and Outs of Bitcoin for Merchants” by Bernhard Kaufmann, which is currently available on Leanpub (with minimum price being FREE). I happen to know Bernhard for quite a few years, and have learned to trust him in general and his expertise in particular. Enjoy his writing about blockchain-related security issues (though keep in mind that his target audience is merchants so the discussion is not as technical as some of us would prefer).

— No Bugs

Hacking the Servers of Bitcoin Services

“This exposes the services to conventional hacking methodsWhile blockchains are decentralized, many services around them — such as exchanges, wallet services, trading platforms, and mining pools — use centralized servers to store data. This exposes the services to conventional hacking methods used to steal usernames and passwords from wallets.

“Armed with this information, criminals could steal user’s cryptocurrenciesArmed with this information, criminals could steal user’s cryptocurrencies. Indeed, major heists in Bitcoin’s history, including Mt. Gox and Bitfinex, were carried out using this form of hacking. Mt. Gox lost big due to its weak IT architecture, among other things. Bitfinex lost user funds through external hacks, while Swiss-based ShapeShift lost its own funds through multiple hacks by an insider. Let it be understood, both Bitfinex and ShapeShift repaid their customers.

A Cornell University research paper explains the technical weaknesses of hacked Bitcoin exchanges: “It’s a dirty little secret that everyone knows: Bitcoin exchanges built on top of first-generation NoSQL infrastructure which lacks even the most basic measures to guarantee the integrity of their accounts.” [Sirer]

Some members of the bitcoin community would like to make every service on the Bitcoin network decentralized and non-reliant on centralized servers. Controversially, this would protect services from conventional phishing and data theft attacks.

Another method would be to ensure that best practices are strictly adhered to when it comes to data security. There is nothing inherently different about Bitcoin exchanges when compared to any other web service. They simply need to
focus more on securing their digital assets.

Phishing Data from Wallets

Bitcoin wallets are applications that hold the private keys (passwords) required to authorize Bitcoin transfers from one address to another on the blockchain. If attackers access these private keys, they can move all the bitcoins from these addresses to addresses they control. And since Bitcoin transactions are irreversible, the owner can do nothing about
stolen coins.

This seems to be the biggest potential security threat. Because private keys represent monetary value, they are the first targets of hackers. This doesn’t mean that private keys and blockchain technology are inherently more insecure than any other web technology. It just means that extra precautions need to be considered and put in place in order
to ensure that private keys don’t end up in the wrong hands.

“Hackers tend to mostly target ‘online services’ that store the private keys for a large number of users.Private keys are often stolen through social engineering, remote access of a target’s devices, or the use of advanced private key grabbing tools. A better-known IT-security expert states, “No matter where you store your private key, your wallet is vulnerable to theft since the hacker simply needs to gain access to your private key. Hackers tend to mostly target ‘online services’ that store the private keys for a large number of users.” [Shahapurkar]

Multifactor authentication has become the industry standard for wallet protection. Two-factor authentication, also known as 2FA, is a two-step verification process that provides an extra layer of security and requires not only a password and username, but also something that only the user has (i.e., a code delivered by text message). Another viable solution is storing private keys “offline” in what are called cold storage solutions. These have been available on the market for some time now and are already the de facto standard for securing private keys at exchanges.

Which Blockchain Is the Most Secure?

“Each blockchain has its own unique security strengths and weaknesses.Each blockchain has its own unique security strengths and weaknesses. For instance, Bitcoin has the highest level of computational power behind it, but the platform is too rigid for innovation. Ethereum, on the other hand, allows Turing-complete scripting, which keeps it open to innovation. After the ‘The DAO’ fiasco, however, its security model has been called into question.

To offer the same computational capacity as Ethereum, a group of developers has built a new platform on top of Bitcoin, called Rootstock. The weakness of Rootstock, however, is that it relies on the goodwill of Bitcoin miners for its security. If, for whatever reason, miners ceased to support it, it would die.

Set of Instruments: Hardfork or Softfork?

When the protocol changes or improvements require the entire network to upgrade, a “hard fork” is created. Miners and nodes that don’t upgrade will get stuck on an incompatible chain. Both the new and old chains run in parallel, but follow different sets of rules. Each will use a different version of the same coin, and every coin in existence gets duplicated.

Of course, the bitcoins won’t be worth the same and they are not transferable across chains. In comparison, if more than 51% of miners agree to a change, they can enforce it on the entire network without anyone else making changes to their software. This is called a “soft fork.” At the end of the day, there will still be one chain and one coin with no change in value.

In July 2016, the Ethereum blockchain had to implement an upgrade to their node software and did so as a hard fork, rather than a soft fork, specifically to eliminate the possibility of a DDoS attack. That is why there are different Ethereum coins today: official Ether and Ether classic.

On August 1st 2017, the Bitcoin scaling question became murkier and thus put the network’s security and stability at risk. Bitcoin Cash was introduced as a hard fork permanently splitting the Bitcoin blockchain into separate payment networks. Now there is an altcoin called Bitcoin Cash (BCH) allowing block sizes of up to 8 MB, and the original bitcoin (BTC or XBT). This move sent bitcoin’s price to yet another all-time high, spurred by optimism that faster transaction times will hasten the spread of the cryptocurrency. Also, the hardfork has supposedly ended the ongoing scaling debate which was going on for years, and split the Bitcoin community into different camps.

Security Outlook

“The main argument in favour of increased block size is the lagging transaction speed, since confirmations are now slow to process when too many transactions take place concurrently.Scalability is the key to Bitcoin’s future growth. The main argument in favour of increased block size is the lagging transaction speed, since confirmations are now slow to process when too many transactions take place concurrently. To date, the Bitcoin network supports only a few transactions per second compared to 15,000 per second on the VISA network. Increasing the block size would lead to more transactions and faster confirmation times for Bitcoin transfers.

In fact, there are a number of Bitcoin improvement protocols on the table suggesting an increase in the block size, however, some Bitcoin developers fear that the decentralized nature of the network would make mining operations more expensive, leading to fewer participants controlling the computing power, thereby damaging the original decentralization concept.

Shortly after the Bitcoin Cash hardfork occured, the original Bitcoin blockchain had begun to adopt Segregated Witness, a solution that separates transaction signatures from the rest of the data on the blockchain. It resolves several issues, including transaction malleability. [Van Wirdum] All in all, SegWit, being Bitcoin’s biggest protocol upgrade to date, introduces a whole new data structure. It provides a boost in transaction capacity while remaining compatible with earlier versions of Bitcoin software, fixes transaction malleability that has been a roadblock for other Bitcoin projects, and the implementation of the Lightning Network has become feasible.

Throughout November 2017 users will be waiting to see if the SegWit protocol actually produces what developers claimed it would and if it really increases the transaction throughput and makes fees cheaper. If the problems remain unresolved, the network is likely to experience more temporary crashes, which negatively impact operational security for Bitcoin firms and merchants. In addition, this limitation of the Bitcoin network has led to higher transaction fees and has increased the likelihood that they will continue to rise. This is in fact the current status quo. Today, the low block size limit incentivizes miners, and a fee market has started to evolve.

“The Lightning Network is the next generation of proposed solutions to the Bitcoin scalability problemThe Lightning Network is the next generation of proposed solutions to the Bitcoin scalability problem. It allows participants to transfer money to each other without worrying about block confirmation times. Security is enforced by blockchain smart-contracts without creating an on-blockchain transaction for individual payments. The Lightning Network is scalable. It supports millions to billions of transactions per second across the network. Payment speed is measured in milliseconds to seconds. The capacity blows away legacy payment rails by many orders of magnitude. Also, it is supposed to come with exceptionally low fees, which allow for emerging use cases such as instant micropayments.