Lost cryptocurrency occurs when one loses complete access to their digital assets due to smart contract vulnerabilities. This could be caused by errors in withdrawal functions or their complete absence. This is often due to inadequate testing and auditing before smart contracts official launch.
Conor Grogan also noted that forgotten wallets were not considered in the calculation:
To be clear, this $1.1B+ number significantly undershoots the actual lost/inaccessible ETH amount. It just covers instances where Ethereum is locked forever. For example, it doesn’t cover lost private keys or things like Genesis wallets that have presumably been forgotten.
One of the largest losses occurred in 2017 with Parity MultiSig, where a vulnerability in the code resulted in 513,774 ETH being frozen. Furthermore, users mistakenly sent over 24,000 ETH to burn addresses. Unfortunately, in such cases, assets cannot be recovered, making it essential to prevent such events.
How to secure your cryptocurrency?
Unfortunately, there’s no foolproof way to protect your cryptocurrency held in smart contracts. However, some recommendations can help you reduce the risk of such incidents.
1. Do Your Own Research
As cliché as it may sound, the most effective method is thorough research of projects, wallets, and exchanges before investing or storing funds. Technology reviews and audits from trusted companies can help avoid low-quality decentralized applications.
It’s not just about using multiple wallets, but about redistributing funds to different projects and assets. Since centralized exchanges are not recommended for long-term storage, and some blockchains may experience issues, it’s better to use different blockchains.
3. Follow Cybersecurity Rules
Phishing emails and websites are just a few of the tactics used by scammers to impersonate official apps, causing users to send cryptocurrency to a fake address that may not even have a withdrawal function. To prevent this, you need to check all links, use a VPN, and enable 2FA (two-factor authentication) on centralized services.
4. Consider Insurance
There are now several insurance companies working with cryptocurrency, which can provide additional protection against losses. However, it’s critical to understand that the industry is new, and there are no comprehensive policies. Local policies may not be available in all countries, be very expensive, or only cover specific projects.
Smart contracts are a truly powerful tool that is already used not only in cryptocurrencies, but also in everyday life. Therefore, it’s important to minimize the risk of losing funds by following certain security rules when interacting with smart contracts.