Security top of mind for Web3 investors: report

Security is at the top of mind for those investors and stakeholders within the Web3 industry, according to a new trends report.

A Future Today Institute report noted that hacking events over the years have exposed weaknesses in nascent Web3 mechanisms which platforms will need to address in the near term in order to ensure Web3 is reliable and scalable.

Last year there were some major losses in the crypto sector, such as the FTX and BlockFi collapse. The losses from these collapses plus a volatile market saw crypto losses of up to US$3.9 billion.

These losses arose from hackers who exploited vulnerabilities in crosschain bridges, highlighting a serious security concern since bridges are crucial to a seamless and open Web3, according to the report.

Bridges centralise funds, creating a concentrated target for hackers.

The authors explained, “The hacks mostly occur through two approaches: a code attack, such as the wormhole loss, when the platform lost $300 million; or attacks through social engineering, such as the Harmony Horizon Bridge loss, in which hackers obtained electronic signatures to authorize a transfer and stole $100 million.

“In the near term, bridges will need to improve security and harden code to create an ecosystem that assures investors that their assets are safe.”

Regulation

Due to these hacking events, regulation will most likely be introduced that will require Web3 platforms to be better regulated by governments.

This regulation is currently being developed in several countries. Those organisations that create and use Web3 capabilities will need to keep themselves up to date about these changes to ensure they are compliant with their country’s legislation.

New regulation adopted by a number of countries in 2022 signals a desire of governments to create clarity and oversight into the emerging Web3 environment, the report noted.

“In some places, specifically Brazil, El Salvador, Dubai, and the United Kingdom, laws or policies were passed in 2022 that regulated cryptocurrency and digital assets,” the authors wrote.

Other releases, such as the executive order on Ensuring Responsible Development of Digital Assets issued by President Biden in March 2022, outline recommendations for cryptocurrency transactions or planned regulations.

The report noted that a singular focus on cryptocurrency and digital assets is a common thread.

“To date, regulations are not targeted at governing underlying blockchain protocols, data collection mechanisms, storage requirements, or other foundational aspects of Web3,” the authors added.