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2023 | Book

The C.I.A Properties of Web3 System Read chapter Read first chapter

A Comprehensive Guide for Web3 Security

From Technology, Economic and Legal Aspects

Editors: Ken Huang, Dyma Budorin, Lisa JY Tan, Winston Ma, Zhijun William Zhang

Publisher: Springer Nature Switzerland

Book Series : Future of Business and Finance

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Technik" , Springer Professional "Wirtschaft"

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About this book

With the recent debacle of cryptocurrency exchange FTX and the crypto trading company Alameda Research, the importance of comprehending the security and regulations of Web3, cryptocurrency, and blockchain projects has been magnified. To avoid similar economic and security failures in future Web3 projects, the book provides an essential guide that offers a comprehensive and systematic approach to addressing security concerns. Written by experts in tech and finance, it provides an objective, professional, and in-depth analysis of security and privacy issues associated with Web3 and blockchain projects.

This book highlights the security related to foundational Web3 building blocks such as blockchain, crypto wallets, smart contracts, and token economics, and describes recommended security processes and procedures for Web3 application development such as DevSecOps, data analytics, and data authenticity via the oracle. Moreover, the book discusses the legal and regulatory aspects of Web3 and the reasons behind the failures of well-known Web3 projects. It also contains detailed case studies of web3 projects, analyses of the reasons for their failures, and some pending legal cases.

This book is an excellent resource for a diverse range of readers, with particular appeal to web3 developers, architects, project owners, and cybersecurity professionals seeking to deepen their knowledge of Web3 security.

Table of Contents

Frontmatter

Part I

Frontmatter
Chapter 1. The C.I.A Properties of Web3 System
Abstract
This chapter examines the aspects of the confidentiality, integrity, and availability (CIA) triad to blockchain technology from a cybersecurity perspective. The CIA triad is a fundamental concept that forms the basis of effective information security measures. The chapter discusses the importance of each of the CIA triad properties in protecting sensitive information and maintaining reliable systems.
The chapter argues that the CIA triad is still relevant in the Web3 era, where blockchain technology is at the core of value-based and self-sovereign information systems. The chapter explores the unique advantages and challenges of blockchain technology in terms of the CIA triad.
Regarding confidentiality, the chapter discusses the limitations of pseudo-anonymity in providing sufficient confidentiality of blockchain data without privacy-preserving technology or protocols. In terms of integrity, the chapter examines the immutability of the blockchain ledger and the importance of security and liveness in consensus algorithm design to ensure data integrity.
Finally, the chapter addresses the availability of blockchain, which relies on data replication, scalability, latency, and on-chain and off-chain data. By understanding the CIA triad and its application to blockchain technology, security professionals can effectively prioritize and allocate resources to protect information and systems in the Web3 era.
Ken Huang
Chapter 2. Chain Security: Nodes, Algorithm, and Network
Abstract
This chapter offers a comprehensive overview of three key aspects of blockchain security: node security, consensus algorithm security, and network layer security. Each element is vital to maintain the integrity of the blockchain network and prevent manipulation by malicious actors.
Node security is explored, stressing the significance of securing individual nodes with secure hardware, robust encryption, regular updates, and decentralization. The risks of node centralization are discussed, emphasizing the need for a decentralized network to avoid a single point of failure.
The critical role of consensus algorithm security in validating and adding new blocks to the ledger is examined, ensuring all nodes agree on the ledger’s state and preventing tampering. A secure, well-designed consensus algorithm that undergoes regular updates is crucial, as a flawed algorithm can jeopardize the entire network’s security.
Lastly, the chapter addresses network layer security, focusing on protecting data transmitted between nodes. Network integrity protection is highlighted, emphasizing the importance of countermeasures against network layer attack to safeguard the blockchain.
Ken Huang
Chapter 3. Wallet Security
Abstract
This chapter delves into wallet security in the blockchain ecosystem, discussing the types of wallets, their underlying technologies, and their critical role in securing digital assets and facilitating transactions. It emphasizes the importance of wallet security, covering past wallet hacks, auditing significance, and various tools and methodologies for auditing.
The chapter explains the different types of blockchain wallets, comparing them to traditional banking systems and distinguishing between custodial and non-custodial wallets. It explores the technical aspects of wallets, including public and private keys, key management, smart contract wallets, multisignature wallets, and attack vectors.
In summary, this chapter offers valuable insights and practical advice on wallet security in the blockchain space, focusing on risk mitigation, user education, and proactive auditing. It highlights the significance of robust wallet security measures for the safety, integrity, and long-term success of the blockchain ecosystem.
Carlo Parisi, Dyma Budorin, Ostap Khalavka
Chapter 4. Smart Contract Security
Abstract
This chapter offers a comprehensive overview of smart contract security, emphasizing the importance of identifying and addressing challenges and vulnerabilities.
The chapter presents a detailed smart contract security checklist for developers and auditors, followed by an in-depth analysis of the top security vulnerabilities. It underscores the importance of smart contract audits, highlighting the need for rigorous auditing processes to identify and remediate potential security risks.
The chapter concludes with reflections on the future of smart contract security, emphasizing the need for continuous improvement and adaptation to stay ahead of emerging threats. It highlights the importance of robust security practices for ensuring the safety and long-term success of Web3 platforms.
In summary, this chapter serves as a thorough guide to smart contract security, focusing on risk mitigation, proactive security measures, and rigorous auditing. It provides valuable insights and practical advice for navigating the complex and rapidly evolving world of decentralized platforms, ensuring a safer and more robust Web3 ecosystem.
Carlo Parisi, Dyma Budorin
Chapter 5. Token Economics Model Creation and Security
Abstract
This chapter offers a comprehensive exploration of token economics, its underlying principles, and the security challenges associated with it. The chapter begins by differentiating tokens from the economy and establishing that the design of token economies is not a novel concept. It then delves into the importance of token economics and the associated risks.
The chapter further defines token economics and examines the interplay between Web3 security and token economics, touching upon Ponzinomics. It compares Web3 with existing economic structures and explicates the components of token economics. The Economics Design Framework is introduced, focusing on market design, mechanism design, and token design as vital elements in delivering real value to users and striking a balance between monetary policies and the value creation cycle.
Subsequently, the chapter discusses token economics stress tests and economics risk monitoring and addresses cybersecurity risks in the context of token economics. The chapter concludes with a summary of the key points and an overview of ongoing research in the field of tokenomics.
Lisa J. Y. Tan
Chapter 6. Economic Exploits and Risk Mitigation Strategies
Abstract
This chapter delves into case studies related to token economics, highlighting risks, exploits, and potential solutions. It also discusses the opportunities and threats brought by artificial intelligence (AI) in the field of token economics.
The first case study examines an economic exploit achieved through financial engineering and suggests risk adjustment as a potential solution. The second case study addresses risks associated with incentive mechanism design, proposing economy parameter adjustment as a solution. The third case study explores Bancor’s insurance mechanism exploited by Celsius and Bancor’s response to the issue.
The chapter further examines the impact of AI on token economics, outlining its potential benefits and challenges. Ten key considerations for assessing economic risk metrics in token economics are presented, emphasizing the need for thorough analysis.
Finally, the chapter underscores the importance of recognizing and addressing risks associated with token economics, given its growing significance in the evolving world of digital assets and Web3 technologies.
Lisa J. Y. Tan

Part II

Frontmatter
Chapter 7. DevSecOps for Web3
Abstract
This chapter discusses the crucial role of DevSecOps in Web3 application development. DevSecOps combines development, security, and operation and is essential for Web3 applications that use public blockchains with real-time transaction settlement and immutability.
Due to the lack of a “charge-back” option in public blockchains, Web3 applications require higher security standards than traditional financial systems. DevSecOps can help identify security issues early on in the development phase, and automated security tools can be employed during the build phase to detect security bugs. However, DevSecOps is not widely adopted among Web3 projects due to a lack of awareness and skills among DevSecOps professionals.
Web3 applications rely on Web2 technologies that are vulnerable to security attacks, such as cloud hosting and centralized databases. Therefore, DevSecOps can enhance the security and integrity of Web3 applications, protect user data and transactions, and improve overall quality.
This chapter provides practical insights into how to introduce DevSecOps into Web3 application development, and it also includes sample security tools for successful automation. By adopting DevSecOps, Web3 developers can ensure that their applications meet higher security standards and enhance the trust and confidence of their users.
Ken Huang
Chapter 8. Web3 Security Analytics
Abstract
This chapter offers a comprehensive overview of on-chain analytics and monitoring in Web3, discussing both preventive and reactive approaches to security and risk management. It explains key concepts, techniques, and principles of on-chain analysis, emphasizing the importance of balancing proactive and responsive strategies in a decentralized digital economy.
The chapter covers the evolution and future prospects of preventive on-chain analysis, highlighting the growing reliance on machine learning, AI-driven tools, and the need for enhanced cross-chain and privacy-preserving capabilities. It also discusses reactive on-chain analysis, stressing the value of real-time monitoring, manual expert analysis, and the potential for automation and integration with smart contract operational services.
Additionally, the chapter delves into various tools and platforms for on-chain analysis, discussing their advantages, limitations, and implications for security and user experience. It concludes with a forward-looking discussion on the future of on-chain analysis, envisioning greater integration, innovation, and collaboration across preventive and reactive strategies, while addressing cross-chain, interoperability, and privacy concerns in the Web3 ecosystem.
Overall, this chapter serves as a valuable resource for understanding on-chain analytics and monitoring in Web3 and their contribution to the security, resilience, and success of the decentralized digital economy.
Carlo Parisi, Dmitriy Budorin
Chapter 9. Data Authenticity
Abstract
This chapter provides a comprehensive overview of Data Authenticity in Web3 ecosystem using blockchain oracles, including their types, examples of data oracle providers, use cases, design considerations, and security attacks with their countermeasures. The chapter covers five types of blockchain oracles, including input, output, cross-chain, compute-enabled, and other types. Examples of data oracle providers are provided, along with their use cases, such as decentralized finance, dynamic NFTs and gaming, insurance, enterprise supply chain management, prediction markets, and sustainability. The chapter also discusses the design considerations that should be taken into account when building blockchain oracles. Additionally, it covers security attacks on oracles, including insider attacks, oracle bribery, oracle front-running, and oracle extortion. Finally, countermeasures to these security attacks are presented to mitigate the risks of oracle manipulation and ensure the integrity of blockchain networks. This book chapter is a valuable resource for anyone interested in understanding the importance of oracles in blockchain networks and how to design and secure them effectively.
Ken Huang
Chapter 10. Security in Permissioned Blockchain
Abstract
When enterprises adopt the blockchain technology for their use cases, they typically would choose to deploy a permissioned blockchain, in which only authorized parties would be able to run a blockchain node. With the smaller number of nodes run by known entities, these blockchain networks tend to have much higher throughput, use simplified consensus protocols, and be able to provide privacy features while gaining the benefits of transparency, integrity, etc.
When adopting a permissioned blockchain solution, the participants need to pay special attention to the architecture design to make sure the number of nodes, the level of independence among the nodes, and the chosen consensus protocol would provide enough decentralization so that the architecture could support the business objectives as intended. They need to ensure a robust mechanism for onboarding new nodes and verifying the identity of each node during operations, and defining the strategy for removing nodes, ensuring that such action would not compromise the integrity of the overall architecture. The participants should then fully leverage the security practices within the organizations to secure each node as well as the communications between these nodes and synchronize on any need to upgrade the blockchain software or smart contracts.
William Zhang

Part III

Frontmatter
Chapter 11. Regulation and Crypto on a Cliff Edge
Abstract
The collapse of FTX exchanges, in November 2022 put a capstone on a terrible year of failures and lost market value in the world of digital assets. Its profound implications included not only the change of institutional investors’ attitude to crypto-assets, but also the rapid rise of global regulations on the crypto markets. This chapter focuses on the regulatory approaches from the three biggest markets: China, USA, the EU.
While China develops its own sovereign digital currency and put a full stop on the private crypto markets, in April 2023, the European Parliament gave its final blessing to the new Markets in Crypto-Assets Regulation, the world’s first comprehensive framework for crypto regulation, to both support and regulate the crypto space. The USA is accelerating its regulatory development. With global regulation rising, the crypto community must pay close attention to such developments and adapt to the “new normal.”
Winston Ma
Chapter 12. Terrorist Financing, War Crimes, and Crypto Geopolitics
Abstract
The ongoing Russia–Ukraine war highlights the rising participation of sovereign nations in the cross-border crypto ecosystem, as well as the profound implications for private players—ranging from sanctions concerns to complicity with potential war crimes. The international crypto markets must develop best practices for crypto-based fundraising, sanctions compliance, and anti-financial-crime controls in the wake of a rapidly changing crypto regulatory landscape.
To that end, crypto assets are not “non-traceable.” In fact, the primary vulnerability that illicit actors exploit stems from non-compliance by DeFi services with AML/CFT and sanctions obligations. The international community has developed a comprehensive, multinational response with enforcement power, the Financial Action Task Force (FATF). The latest enforcement actions taken by FTFA member states would accelerate the travel rule adoption and enforcement, and the new blockchain analysis technologies are providing powerful “crypto intelligence” tools for all stakeholders.
Winston Ma
Metadata
Title
A Comprehensive Guide for Web3 Security
Editors
Ken Huang
Dyma Budorin
Lisa JY Tan
Winston Ma
Zhijun William Zhang
Copyright Year
2023
Electronic ISBN
978-3-031-39288-7
Print ISBN
978-3-031-39287-0
DOI
https://doi.org/10.1007/978-3-031-39288-7