According to our recent poll on Twitter, 87% of respondents see security as the most important aspect when choosing a digital asset platform
Smart contract failure, counterparty risk and self-custody risks are some of the concerns for holders of digital assets
Yield App’s internal proprietary risk model ensures that these risks are reduced to a minimum
Yield App introduced enhanced security features with the release of V2 and follows strict KYC requirements
Yield App recently passed a proof of reserves audit by Armanino LLP, allowing our customers to verify that their assets are accounted for
The digital asset space is fraught with risks for new investors, with countless protocols promising high returns emerging every day. These attract new and inexperienced users, many of whom are ready to deploy their capital in the promising world of an entirely new asset class, with entirely new risks. As such, it is particularly important to learn how to keep one’s digital assets secure in this rapidly growing space.
At Yield App, we take security seriously and risk assessment is a key aspect of our management strategy. Our recent poll on Twitter shows that our community feels the same, with 87% of respondents naming security as their top priority when choosing a digital asset platform. Below, we take a look at a selection of common risks associated with digital asset investing and steps that can be taken to mitigate them.
Risks to consider when investing in digital assets
Smart contract failure
Smart contracts are the foundation of the digital asset industry. Since all applications are built on them, they hold most of the value, making them attractive to bad actors. As such, digital asset investors face the risk of hacks or exploits which could see a bad actor take advantage of a weakness in the armor or a smart contract to drain the liquidity.
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Like any other investor, digital asset investors also face the risk that a third party where their assets are deployed could suffer a loss or fail to honor its obligations. This is why conducting your own research is so important to verify the credentials of any project or platform to which you entrust your assets.
A unique risk when it comes to digital assets compared to traditional investments is self-custody risk – the risk of managing one’s own assets. Self-custody means only you have the possession of your digital assets because only you have access to the private key.
This is attractive for many investors from a privacy point of view, but it does leave them with the responsibility to safeguard access to their private keys. If the private key or backup is compromised, the investor stands to lose his or her digital assets.
How can these risks be avoided?
Conduct your research
The examples above are just a few of the risks a cautious digital asset investor must be wary of. Before using a new protocol, it’s very important to do your due diligence and research to make sure it is safe and secure.
The starting point could be a digital asset data aggregator, such as CoinMarketCap or CoinGecko, where almost all projects are listed. Besides market capitalization and price history, these websites will show the centralized exchanges (CEXs) and decentralized exchanges (DEXs) on which the token of interest is listed.
READ: How to secure your cryptocurrency
A legitimate project will be transparent about the team behind it and their professional history. You should be able to find out who the key team members are via a project’s website and look at their social media and LinkedIn profiles to verify that they have a history of diligence in a professional capacity that supports the long-term viability of the project. Yield App lists all the key members of our team on our website with links to their LinkedIn profiles.
It is worth checking if the platform or project you are using has been audited by a reliable third party. Please note, however, that it’s essential to take into consideration the quality of the auditor and their history.
An audit looks for backdoors, exploitable scripts, and security issues in the smart contract code of a decentralized app (dApp). Security issues are reported to the project, which can then make changes to the code. An audit can’t guarantee the security of a project, but it does increase the chance that your assets will be secure. In a recent analysis of auditors in the space and a sample of exploited code, our DeFi team has identified that a second audit on a smart contract can reduce relative risk by up to 70%.
You can also conduct research on a token’s model, emissions and distribution schedule, as well as historic performance and use cases, to glean insights into the legitimacy of the project. Find out more about this from our dedicated blog about tokenomics.
The advantages of digital asset platforms
Using a reputable digital asset platform that conducts this due diligence on your behalf can greatly reduce these risks in your portfolio. For example, to hedge against smart contract risk, Yield App utilizes an internal proprietary risk model that focuses on four pillars of safety, a sum of 128 measured variables compiled through historical data.
We only ever deploy assets into well-proven protocols which have undergone full due diligence and ensure our portfolio strategy remains highly diversified at all times to limit unexpected loss to a minimum.
Self-custody risks can be mitigated through the use of cold wallets. These are hardware devices, usually in the form of a USB or bluetooth device, which are considered the most secure way to store cryptocurrency since they are not connected to the internet.
However, using a digital asset platform such as Yield App provides additional layers of security, negating the need for a hardware device to protect your digital assets. Yield App uses multi-party computation (MPC) in-house to protect our customers’ assets. MPC is a cryptographic tool that allows multiple parties to make calculations using their combined data, without revealing their individual input.
READ: What is a proof of reserves audit and what does it mean for the safety of your assets?
Yield App’s assets have also been fully audited by top US auditor Armanino LLP in January 2022, with the audit available here.
With the release of V2, we also introduced enhanced security features, including an automatic logout feature, an activity log, and the ability to set daily withdrawal limits.
Compliance means security
Although the digital asset space as a whole remains largely unregulated at this stage, compliance with existing finance regulations can also be a key indicator of the legitimacy of a project or platform.
Regulation is paramount to promote mass adoption of digital assets. Without anti-money laundering (AML) regulation, for example, blockchain technology would be prone to being used for money laundering purposes. This is something the industry has repeatedly been accused of, which does not promote acceptance and adoption.
Know-your-customer (KYC) requirements for digital asset service providers also have several positive impacts. They combat identity theft and money laundering and create trust and accountability for digital asset platforms, allowing them to be sure that their customers are who they claim to be. The resulting reputational benefits have a positive effect on the industry as a whole. Conversely, digital asset platforms that do not comply with regulations could risk having to restrict their services or be subject to heavy fines.
READ: The Yield App Q4 Report: AUM up 40% as assets pass Armanino audit
Yield App operates under a European digital asset services license, complies with the highest global regulatory standards and applies robust risk management strategies. From 1 April 2022, all Yield App customers must be verified up to Know Your Customer (KYC) level 2 in order to continue being able to use our platform.
Yield App takes security as seriously as our customers do. We take all the steps outlined in this article to ensure our customers’ assets are as secure as they can be, allowing you to sleep soundly at night while you earn passive income on your digital assets.
Do you want to earn the market’s leading interest rates on your digital assets? Sign up for a Yield App account today!
DISCLAIMER: The content of this article does not constitute financial advice and is for informational purposes only. The price of digital assets can go down as well as up, and you may lose all of your capital. Investors should consult a professional advisor before making any investment decisions.