Web3 is a decentralized version of the internet gaining popularity worldwide. It brings new opportunities for communication, business and entertainment. Blockchain introduces a new brand of economic system, a new generation of games and social media. Web3 development is growing rapidly. For example, the number of active blockchain wallets has increased by 639%, and there has been a significant growth in the number of active GamFi users.

However, Web3 technology still remains IT-based, which means it has its own vulnerabilities that need to be addressed. It is essential to understand and address these vulnerabilities to provide the security of Web3 solutions. 

Read this article and find out about the top 10 Web3 vulnerabilities, their challenges, and solutions to help businesses protect themselves from potential attacks.

Fundamentals of Web3 ecosystem

Let’s start from the beginning. Web3 refers to the next generation of the internet that is decentralized, making it totally different from Web2. In Web3, the client-server model is replaced by a distributed one. It’s main principles are:

Decentralization. The whole global system’s not controlled by a single company. Instead, it consists of a network of nodes working together. In this way, they maintain the integrity, efficiency and security of Web3.

Blockchain technology at the core. This is a distributed database shared among a computer network's nodes.  Blockchain ensures security and transparency while storing and transferring data. 

Smart Contracts.They are self-executing contracts with embedded terms of the agreement between two addresses. This kind of agreement’s directly written into the code. Smart contracts automate transactions and reduce the services of interceders.

Web3 is designed to be interoperable. It means that it can work with other networks and protocols. Developers can build a crypto project that directly interacts with other applications and even networks.

Finally, Web3 users can create non-fungible tokens, which can represent assets and currencies. 

These fundamentals of Web3 are boosting the adoption of decentralized solutions and improving the way businesses operate with customers.

The Benefits of Web3 Platforms for Businesses

In the B2B sector, Web3 is improving the way businesses operate. Moreover, for Web3 builders, product managers, and C-level executives, the adoption of Web3 technologies can be a new opportunity to scale their capacities.

Enhancing User Experiences 

Web3 technologies let create decentralized applications that offer user-centric experiences. Users can now have full control over their data, identities, and digital assets.

Automation

Smart contracts automate and streamline complex business processes and reduce costs. For example, supply chain management can be improved by using smart contracts. They track and verify the authenticity of products, their logistics etc.

Collaboration

Web3 increases interoperability among platforms and ecosystems. Through blockchain protocols, businesses securely connect and share data, thereby leveling up the efficiency of the connection.

Global Reach and Accessibility

Through peer-to-peer transactions, borderless payments with cryptocurrencies and accessibility for the unbanked, the technology helps reaching customers worldwide. There’s no more traditional banking systems  and international money regulations.

In general words, the benefits of Web3 for businesses are exceptional. They help create secure websites and transactions, new revenue streams and build lasting relationships.

How Businesses Are Using Web3 Infrastructure

Below you’ll find top 5 use cases of the technology’s adoption:

•  Decentralized Finance (DeFi). Such kinds of protocols offer financial services without the commissions and approvals. For example, users of the DeFi crypto wallet can trade assets directly with one another, without the participation of traditional banks in this chain.
• Non-Fungible Tokens (NFTs).  With it, businesses tokenize and sell digital assets, They might be real estate, commodities, water etc. For the artists, musicians, and content creators NFT marketplaces are a perfect way to sell the digitized creations to fans.
• Supply Chain Management.With blockchain, smart contracts, and IoT devices, companies extend the life cycle of a product. 
• Decentralized Governance. Web3 allows creating Decentralized Autonomous Organisations and uses specific tokens for the decision-making. Businesses can utilize these tokens to let their users vote and take part in the project’s life, increasing their engagement.
• Tokenized web3 community rewards. New technology helps businesses create tokenized rewards to reward user engagement and loyalty. As an example, a blockchain-based social media platform could be built that encourages users with cryptocurrency for creating and curating content.

As you see, businesses can enhance trust, security, and transparency in their interactions. Also, they’re exploring new ways for value creation and revenue generation.

Top 10 Security Risks in Web3

Web3 might look like an invincible creature. However, as with any IT-based product, it’s susceptible to software bugs, security issues, and other vulnerabilities. They may represent traditional risks to businesses that may lead to the economic impact, data breaches, and reputational damage. Malicious actors can exploit these vulnerabilities to compromise websites, leak data, infect databases, and conduct injection attacks.

Moreover, the nature of Web3, with its reliance on network consensus and decentralized architecture, introduces new security challenges. It makes it important for businesses to understand and address these vulnerabilities to protect dApps and users’ assets.

So, the weak points are:

1. Smart contracts are inclined to coding errors and reentrancy attacks or unchecked external calls. 
2. Blockchain Consensus Attacks. This means the attempt to disrupt the agreement process among participants. For example, in a network with  proof-of-work (PoW) consensus mechanism, a 51% attack happens when an individual or group obtains control of more than 50% of the network's mining power.
3. Decentralized Applications (DApps) may suffer from insecure permissions, or inadequate access controls. 
4. Web3 wallet can be an easy target for attacks like phishing, keyloggers, or malware. 
5. Oracles, which connect smart contracts with external data sources, can introduce problems if data sources are unreliable. In this case, such a dysfunction can lead to manipulated data being embedded into the smart contracts.
6. Cross-site scripting vulnerabilities can enable attackers to inject malicious code into dApps. It will threaten user data at least. 
7. DoS Attacks can disrupt Web3 services. They overwhelm networks with excessive traffic or resource consumption. 
8. Users could be victims of the phishing attack and social engineering tactics, where attackers deceive users into revealing sensitive information or accessing malicious websites. 
9. Injection attacks API security vulnerabilities and it may lead to the loss of funds, disruption of service etc.
10. Identity and Access Management Issues. Insufficient quality of the KYC and authentication process could lead to identity theft. 

Understanding these potential issues is important for building secure and resilient businesses in the Web sphere.

Challenges in Addressing Web3 Vulnerability Cases

Except for the precise vulnerabilities, the essence of Web3 may be concidered as an obstacle while establishing centralized security measures. It operates on a distributed network, making it difficult to implement comprehensive protective measures across all nodes.

Moreover, the complexity of smart contracts poses a challenge. Written in code, they are vulnerable to Web3 bugs and loopholes that may go unnoticed until triggered. 

Another challenge lies in the lack of regulation within the Web3 ecosystem. As it continues to evolve, there are not enough accepted frameworks. This creates an environment where security practices and protocols vary. They may cause inconveniences during the establishing interconnections and may bring significant expenses. 

Furthermore, Web3 technology introduces new attack vectors that were not present in previous iterations. Novel exploits emerge as new protocols, web3 libraries, platforms, and applications are developed. 

So, addressing Web3 vulnerabilities is a complex task that generally requires strong security measures and collaboration. 

Top 5 Significant Web3 Hacking Events

Unfortunately, the industry has significantly suffered from the imperfection.

Wormhole Bridge Hack 

In February 2022, the Wormhole bridge, a cross-chain communication protocol, was exploited to steal $326 million in cryptocurrency. The attackers manipulated the bridge's vulnerable code to mint a large number of tokens and then exchanged them for other cryptocurrencies.

Beanstalk Farms Hack 

An individual utilized web3 hacking tools against the DeFi protocol Beanstalk Farms and stole $182 million. They used a flash loan attack to manipulate the protocol's pricing mechanism and then run off with a large amount of its native token.

Nomad Bridge Hack

The Nomad bridge, another cross-chain communication protocol, has lost $190 million. The attackers used a similar technique to the Wormhole hack. Then they minted a large number of tokens and then exchanged them for crypto.

Mango Markets Exploit

The decentralized exchange Mango Markets has suffered losses by $114 million. The criminals used a combination of techniques to drain the DEX's liquidity pool.

Rari Capital Exploit 

The DeFi protocol Rari Capital was exploited to steal $150 million. The perpetrators employed a comparable method to the Beanstalk hack, exploiting the protocol's pricing mechanism to get its native token.

As the Web3 ecosystem continues to grow, it is likely that we will see even more damaging attacks. It is therefore essential for developers and users to take steps to create efficient systems that protect themselves from these threats.

Web3 Cyber Security Solutions 

So, what should a business do to avoid becoming a victim of hackers? Reducing Web3 vulnerabilities requires an approach that involves integrating security governance, analysis, and following security-by-design principles.

Here are some additional solutions to fix Web3 vulnerabilities:

• Conduct assessments and audits of smart contracts, protocols, and decentralized applications. They are needed to identify weak points early in the development process.
• Implement best practices for securing smart contracts. Use formal verification tools, testing for edge cases, and avoiding a remote control vulnerability. This is applicable for the cloud solutions too, see the Spatium Wallet Cloud case.
• Use secure coding practices, such as input validation, output encoding, and error handling.
• Minimize attack surface areas, secure defaults, and implement zero-trust framework.
• Establish secure defaults through a selection of systems with secure settings. Prepare strong passwords, and remove unwanted features.
• Use multi-factor authentication and encryption to protect user data and crypto coins as Spatium SDK does.
• Regularly update software to patch vulnerabilities and address threats.
• Build a strong and resistant UI-interface. You can start from scratch or use already existing solutions such as Spatium Wallet UI Kit.
• Provide a reccuring dapp security guidance for developers.
• Conduct web3 bug bounty programs. The community readily engages in such initiatives.

By implementing these solutions and best practices, businesses can prevent the Web3 security breach and protect their products and users.

Final thoughts about web3 security

The evolution of Web3 technologies brings both benefits and challenges. Ice phishing, cryptojacking, smart contract logic hacks, and data manipulation in dApps, underscore the need for innovative security measures within the Web3 ecosystem.

There are already best practices that should be implemented to avoid unpleasant consequences. Secure coding, regular code audits, and ongoing security monitoring can help reduce vulnerabilities.

As Web3 companies move forward, it’s important for developers, auditors, and users to remain vigilant, stay informed about threats, and implement robust security measures to safeguard the integrity and functionality of Web3 applications. This stance towards Web3 security will be contributory in nurturing trust, boosting innovation, and realizing the full potential of blockchain.

FAQ

Is Web3 vulnerable?

It looks like Web3 is still vulnerable and represents some specific Web3 limitations. The total losses in DeFi are over $7 billion in 2023. This is still a high number in the Web3 market. Even though lately figures have decreased, hacks of a different kind and scale happen regularly. But the security systems continue to evolve, blocking paths for attackers.

What is a unique security challenge in the Web3 space?

Decentralization means there is no single point of control, which naturally creates a significant security challenge. A Web3 platform is made up of multiple nodes, and each node could potentially be a point of vulnerability if not adequately secured. This increases the attack in Web3 dramatically.

Why is wallet security important in Web3?

Web3 users require digital wallets to store and manage cryptocurrencies. However, wallets are exposed to phishing, rug pulls, malware, and social engineering. Therefore, users must practice strong security measures, including enabling two-factor authentication. On the other hand, developers should practice secure coding, regular audits, timely updates, and continuous monitoring.

What are Layer 3 security threats?

Layer 3 protocol attacks consist of Internet Protocol, packet sniffing and DoS attacks i.e. ICMP attacks or ping of death. These types of attacks can be performed remotely. To reduce the risk of these types of attacks, packet filtering controls should be used.