Security for Stables: A Blueprint for the Future of Finance

A Call To Action For Those Building The Future of Finance

“The chain is only as strong as its weakest link.”

The motivation for writing this framework comes as stablecoins reach product-market fit this week, with market capitalization hitting a new all-time high—a happy milestone that also paints a target on the back of this burgeoning industry. As stablecoin adoption blazes, so too do the risks that loom in its growing shadow: the rise in the activity and sophistication of state-sponsored hackers in 2024 threatens not only the trust in stablecoins but the infrastructure underpinning the future financial system.

There are many who dismiss the scams and hacks as nothing more than the inevitable growing pains of an emerging technology—akin to the wild west of the early internet or the infancy of digital banking three decades ago. This assumption is a dangerous one—here’s why:

1. The Security Paradox: The features that make blockchain revolutionary—its open and permissionless design—also create an environment that heavily favors threat actors: its transparency provides attackers with complete visibility of targets and attack vectors; the anonymity it affords offers low-risk execution. For attackers, the rewards are immense, and the risks are negligible. In stark contrast, well-intentioned blockchain developers face steep costs, misaligned incentives, and the nearly impossible task of securing every potential vulnerability. Attackers need only exploit a single weakness.
2. Increased Scale and Frequency of Threats: Consider the cyber incidents that shocked the world in the 90s—a digital heist that siphoned $10 million from Citibank in ‘94, or a fear of global meltdown caused by digital clocks resetting in the year 2000—threats that seem almost laughable in comparison to those we face today. The aggressors today aren’t teenagers in basements but highly organized groups. Successful attacks are performed weekly, with losses frequently surpassing hundreds of millions of dollars.
3. The Escalating Impact of Breaches: Alarmingly, stolen funds have been funneled into programs that threaten global security—primarily nuclear weapons development. There are real-world consequences.

The companies that will drive transformational impact in the next decade are those that won’t compromise on trust and security today. The question isn’t if a threat will arise, it’s when. This guide—and everything we do at FailSafe—is designed to equip stablecoin practitioners with the knowledge to understand critical attack vectors and implement practical, actionable measures to mitigate risks when they arise. From vulnerabilities in smart contract code and private key management to operational oversights and dependency on third-party services, each potential weakness must be fortified to sustain trust in an environment where a single breach can cascade into catastrophic consequences.

Security Risks Associated with Stablecoins

Securing Stability

Security risks are among the most critical challenges stablecoin issuers face—a single weakness can cause catastrophic failure. At its core, the stability of the system hinges on two primary failure points: compromised access control mechanisms and vulnerabilities in smart contracts.

Like other decentralized finance (DeFi) organizations, stablecoin issuers must manage private keys, deploy smart contracts, and navigate a complex, constantly evolving ecosystem. These shared challenges expose stablecoins to a broad range of vulnerabilities, making robust security measures absolutely essential for their continued success. 

Compromised Access Control

Unauthorized access can stem from a range of vulnerabilities—whether it’s improperly secured private keys or sophisticated phishing attempts to gain elevated permissions. For stablecoin issuers, the consequences of compromised access control are particularly severe, allowing for unauthorized minting of tokens, draining of collateral reserves, and complete system destabilization.

Exposed Private Key or Seed Phrase

The private key is the root of trust in blockchain. The seed phrase is a unique sequence of dictionary words that together form a phrase needed to recover access to the wallet. Attackers often attempt to obtain control of keys by injecting malware into signing devices or tricking signers into sharing seed phrases. According to Chainalysis, private key compromises accounted for the largest share of stolen crypto (approximately 44%) in 2024.

Stolen Signatures and Permissions

Every private key generates a unique signature to verify transactions. In many successful attacks, adversaries don’t steal keys outright; they trick users or systems into providing a legitimate signature, which is then modified to perform a malicious transaction. This is often the case for multisignature wallets, which require signatures from multiple keys. Several major hacks followed this attack vector in 2024:

Radiant Capital Hack: Malicious software infected the signing devices, allowing attackers to intercept and approve unauthorized transactions.

WazirX Breach: Attackers compromised multiple devices in a multisignature setup, gathering all necessary signatures to move funds without detection.

Third-Party Risk

When private keys are managed by external custodians or software providers, any compromise of those systems can directly impact your assets. This risk became alarmingly clear when Japanese exchange DMM Bitcoin suffered a $308 million breach following a successful phishing attack on an employee of wallet service provider Ginco. A single compromised account at a third-party service undermined an entire operation. If you rely on outside providers, make sure you conduct thorough due diligence, require additional verification measures, and maintain robust cybersecurity practices on all sides.

Smart Contract Vulnerabilities

Vulnerabilities in smart contract code have resulted in devastating losses, which is especially concerning given that many projects undergo multiple audits. While necessary, a single point-in-time review of your code isn’t sufficient. Ongoing smart contract monitoring is configured to detect and prevent risks in real-time.

Logic-Based Vulnerabilities

Logic-based vulnerabilities in smart contracts arise from flaws in the core contract logic, which attackers can exploit to manipulate the contract or access funds. Reentrancy attacks are a common example, where an attacker can call back into a contract before it updates its state, draining funds by recursively triggering withdrawals. Integer overflows and underflows occur when a variable exceeds its maximum or minimum value, leading to unexpected behavior that attackers can exploit. Additionally, math errors such as miscalculations or rounding issues can cause incorrect contract behavior, which attackers can exploit for financial gain.

 The stablecoin project Raft—despite having undergone several audits—ceased to exist when a critical calculation vulnerability was exploited, leading to the depegging of the currency.

Financial Manipulation Vulnerabilities

Smart contracts also face financial manipulation risks, particularly through mechanisms like flash loan attacks. In these attacks, malicious actors borrow large sums of assets without collateral to manipulate on-chain data such as asset prices or governance votes, exploiting flaws in the contract’s logic. Another vulnerability in this category is oracle manipulation, where attackers interfere with the off-chain data provided to smart contracts. By feeding false information to the contract, attackers can distort asset prices, destabilize the system, and potentially trigger unauthorized transactions.

Access and Execution Vulnerabilities

Access and execution vulnerabilities are closely tied to how a smart contract controls who can perform actions and how those actions are carried out. If access controls are weak or poorly defined, malicious actors can execute restricted functions, such as transferring funds or altering contract logic. Denial of Service (DoS) attacks can also exploit these weaknesses, where attackers prevent legitimate users from interacting with the contract or executing transactions. Similarly, signature verification exploits allow attackers to forge or replay valid signatures, enabling them to carry out unauthorized transactions and compromise the contract’s integrity.

Security Measures and Best Practices

Apply Defense in Depth

Security isn’t just about individual layers but the synergy of multiple protective measures. Our philosophy emphasizes a multi-layered approach, ensuring that even if one defense is breached, others remain intact to mitigate risks.

Reduce the Attack Surface

One of the most effective ways to enhance security is by reducing the overall attack surface area, which refers to the total number of potential entry points for attackers. Organizations can achieve this by systematically identifying and removing unnecessary services, applications, or features that are not essential for operations. Regular reviews of system configurations and applying the principle of least privilege can further limit access to only those who genuinely need it, thereby minimizing the risk of exploitation.

Enforce Access Control Policies

Enforce operational security with tools like live surveillance solutions to identify when admin-only actions are proposed (Risk Monitoring) and install policy enforcement tools (Guard) to veto transactions that don’t comply with expected behaviours, transaction limits, and within specified geolocations.

Monitor Everything in Real-Time

Configure real-time monitoring solutions to detect signs of fraud or theft. FailSafe’s Risk Monitoring relies on a proprietary threat detection engine that leverages AI and Machine Learning to identify malicious intent and mitigate risks.

Regularly Audit Security

Conducting regular security assessments and audits is crucial for identifying vulnerabilities within stablecoin systems and processes. Techniques such as vulnerability scans, penetration testing, and code reviews allow security teams to pinpoint weaknesses before they can be exploited by attackers. These periodical assessments enable organizations to stay ahead of emerging threats and ensure that security measures are current. Incorporating audit results into security procedures supports continuous improvement and enhancement of overall security protocols.

Train Employees Comprehensively

Employees are often the first line of defense in cybersecurity. Organizations should develop robust cybersecurity training programs to educate employees about good hygiene practices, including using strong passwords, connecting only to secure Wi-Fi networks, and recognizing phishing attempts. Regular training sessions help ensure that employees are aware of the evolving threat landscape and are equipped to take the necessary steps to protect themselves and the organization from various cyber risks.

A Final Thought

In military school, we were often reminded: “You don’t own what you can’t defend.” We must take proactive steps to protect the things we care about. If this message resonates with you—and you’re ready to safeguard a future you’re building towards—I encourage you to reach out. Thank you.

Aneirin Flynn
CEO, FailSafe