- HappySwap Risks, Security and Best Practices
Just now·6 min read
There is no doubt whatsoever that more people are drifting towards cryptocurrency and the myriad services it offers such as decentralized finance. While cryptocurrency and decentralized finance in particular has made life easier for people, there are still risks associated with it.
In this article, we would be looking at the different types of risks associated with decentralised finance, how to protect yourself from these risks, and the ways in which HappySwap protects its users.
Decentralized Finance commonly known as DeFi is a financial system that works on a public decentralized blockchain network and makes financial products available. In essence, what DeFi does is provide financial services with the use of a blockchain technology known as smart contracts. Smart contracts are computer codes that digitally enforce and verify an agreement between two parties without the need of any middlemen.
Some of the financial services that decentralized finance offers include:
- Trade tokens
Access to stable currencies
Borrowing of funds
These are just some of the top uses of DeFi today and there is no doubt that in the years to come, DeFi would have a larger list of uses than this.
As useful as decentralized finance has been to the world, providing a liberalized financial market with full access to everyone, there are still risks.
The magic that is decentralised finance is not without its drawbacks. There are a few risks associated with the use of DeFi for transactions. HappySwap does a great job of protecting users from most of these risks, but users must know about them as well to stay safer.
Decentralized finances like HappySwap base their operations on democratising the market and providing liquidity pools. HappySwap gives anyone with enough money the chance to become a market maker by providing liquidity to the market and gaining a little money in trading fees as profit.
Liquidity pools work by providing a space where people can exchange or trade their tokens for another. They come as a paired bond like ETH/DAI, or ETH/USDT. If a user wants to trade DAI for ETH, the liquidity pool provides the equivalent of ETH for the amount of DAI he wants to sell.
Impermanent loss is a DeFi risk that occurs when liquidity providers provide liquidity to the pool and the price of the deposited asset changes after depositing. It is the difference between the value of the cryptocurrency staked in the pool at the time of deposit and the value of the same cryptocurrency pair at a point after staking it.
Impermanent losses are called impermanent because the liquidity provider has not taken their asset out of the pool. In the interim, however, the loss is impermanent because it can be recouped if the liquidity provider decides to HODL.
Price slippage is a type of DeFi risk that occurs as a result of the volatility of the crypto market where the price of a crypto asset changes between the time of the order and the execution of the order. It is commonly referred to as slippage and it occurs more with bulk orders.
Slippage can be positive or negative. When slippage is positive, the price of the crypto asset is less at the time of the execution than it was at the time the order was placed. Negative slippage on the other hand occurs when the price of a crypto asset rises in the duration between the order placement and the order execution. However, both negative and positive slippage are referred to as slippage in the crypto world and aren’t differentiated.
Loss of Private Keys
A private key is a personal cryptography tool that gives a user access to their cryptocurrency. The risk in an individual losing their private keys is that they can no longer have access to the coins and can carry out no transactions with the coins.
A rug pull is a cryptocurrency DeFi risk that has in the last year been the reason for the loss of $113 million. A rug pull risk is one that mostly affects investors although it also affects customers. In a rug pull scam, investors are asked to pool their money together for a project which promises to bring in a lot of ROI at the completion of the project. After investors have pooled their money together, the owners of the project then take all the money and run away.
There are two types of rug pull scams that are common in DeFi — technical manipulation and liquidity scams. The former is concerned with a technical manipulation of the smart contract such that it does not allow buyers to spend the tokens they have purchased.
The second type of rug pull is the more common type of rug pull in DeFi. The scammers list an altcoin and pair it with a cryptocurrency that has a lot of liquidity such as ETH. They then create hype around the liquidity pool they create. When a lot of people have joined the pool and are actively exchanging tokens, the scammers dump their stake, leaving all other stakeholders with useless tokens that have little value.
Wallet draining is another risk in DeFi that involves the use of malware to drain the wallets of individuals. It is a little bit like phishing except that malware is used instead. These malware could be apps that are made to look like legitimate crypto apps only to gain access into the user’s account and drain their wallet of all coins and tokens.
As the values of cryptocurrencies rise, many unsuspecting victims have fallen prey to phishing attacks. These attacks are designed to gain access to the user’s login details after which the scammer gains access to their balance and drains the wallet. The number of phishing attacks in the last year has increased considerably. Scammers can send phishing messages via email, SMS, Google ads, and fake social media pages. They offer juicy deals or a warning about a possible breach into your account and give a link where it can be corrected.
The link takes visitors to a similar website where they end up putting sensitive information that is then cloned by the scammers. You can protect yourself from phishing attacks by double-checking links.
A smart contract is a computer coded contract that self-executes an agreement based on pre-set conditions. It does not require the presence of lawyers to be enforced. Smart contracts are used in any number of ways but in the DeFi sector, it is used to facilitate lending and borrowing as well as token swaps.
With more and more people migrating to cryptocurrency and blockchain for the accessibility and removal of third-party intermediaries, smart contracts are like a dream made true especially as it concerns loaning. In the excitement, however, people tend to forget that smart contracts are autonomous programs written by human beings.
A lot could go wrong with the human component of this program. The developer might not notice and cover all loopholes, and sometimes, the code has errors that become loopholes for dedicated hackers. Any changes that are not made before the program goes live becomes almost impossible to fix.
Smart contract risks often result in heavy losses and have been the leading cause of high-profile losses in DeFi. Last year, some hackers made away with tokens worth $100 million.
No one can protect themselves from all of the DeFi risks out there because some risks such as smart contract risks are not dependent on what a user does but there are some steps you can take to minimize your exposure to these risks.
- Always update your software
Don’t disclose your holdings
Ensure that you use the multiple factor authentication
Only use DeFi exchanges that are trusted
Keep your private keys and passwords safe
How HappySwap Keeps You Safe From These Risks
At HappySwap, we care about running a decentralized exchange that is safe not just for our systems but also for the people who have entrusted their money with us. Most of our efforts are centralized on protecting our platform from smart contract risks.
We make sure to use one contract per vault to ensure that new vaults are built with the same blueprints but different constructors. This ensures that:
- The time for vault implementation is reduced
The vaults are audited end-to-end
We can focus our attention on other aspects of our business other than getting new vaults
In conclusion, risk is the name of the game in finance whether you play in the traditional or decentralized markets. For decentralised finance, there are a few risks that users fall victim to. From impermanent loss to smart contract risks. The best way to reduce your chances of falling prey to these risks is to use a good platform and follow some of the tips outlined above. HappySwap is doing a great job of keeping its platform safe for users to swap tokens. Join us today and take several steps towards safer swapping!
- Date of publication:
- Mon, 09/27/2021 - 03:29
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