The decentralized finance (DeFi) ecosystem is rapidly expanding, with new protocols and apps emerging regularly, creating a highly competitive environment. To distinguish themselves in this crowded space, many DeFi projects have turned to airdrops as a favored strategy for attracting users and building communities.


However, recent events have shed light on the risks associated with airdrops. The Arbitrum airdrop, in particular, encountered difficulties. While users were able to claim tokens worth over US$1 billion, the process was plagued by bugs, frustrations, and scammers seeking to exploit the chaotic situation. This serves as a stark reminder that security should always be a top priority in DeFi, as poorly executed airdrops can pose significant risks.

As DeFi continues to rise, so do the risks of hacks, exploits, and other vulnerabilities. In 2022, crypto hackers stole at least US$3.8 billion, with more than 80% of the thefts targeting DeFi. As the industry matures, it is crucial for the community to prioritize security measures to protect users and ensure the continued growth and success of the ecosystem. Unfortunately, wallets used in token airdrops have been identified as a significant source of security risks, exposing DeFi to potential vulnerabilities.


Wallets play a crucial role in token airdrops as they serve as the primary tool for distributing tokens to participants. In an airdrop, a company or project distributes a certain number of tokens to users who fulfill specific actions. In order to receive these tokens, it is customary for users to furnish a wallet address where the tokens can be transferred to. Without a crypto wallet, participation in an airdrop is not possible, resulting in the loss of potential rewards. Therefore, owning a crypto wallet is a necessary first step for participating in any airdrop.


Tokens received during an airdrop can be stored in the wallet for long-term holding or sold on a cryptocurrency exchange. Regardless of the strategy, having a reliable wallet is essential to prevent token loss and ensure accessibility. By requiring users to possess a crypto wallet, airdrops encourage newcomers to familiarize themselves with and utilize cryptocurrencies, ultimately driving greater adoption and acceptance throughout the industry.


However, wallets in DeFi also present security risks. One primary concern is the underlying algorithm used to generate recovery phrases for new wallets. If the algorithm is weak and generates easily guessable phrases, it becomes susceptible to cracking by programs, leading to the theft of assets stored in the wallet. This has been an ongoing problem and remains a concern in the current Web3 era. 


The vulnerability of wallets to attacks and hacks is attributed to the storage of keys on individual devices.Compromised phones or computers can grant hackers access to the wallet, potentially resulting in asset theft.


Furthermore, instances of wallet providers storing recovery phrases without user knowledge, as seen with the Slope wallet, can lead to data breaches, leaving all wallets vulnerable. As DeFi gains popularity and value, attackers become more sophisticated, requiring wallet providers to remain vigilant and stay ahead of these risks. 


The necessity for heightened security measures has been underscored by several notable incidents of wallet-related security breaches. One such incident involved scammers who specifically targeted users seeking airdrops from Uniswap, a well-known decentralized cryptocurrency exchange. Through deceitful means, these scammers posed as representatives of Uniswap and managed to deceive users into divulging their wallet information. As a result, the scammers gained unauthorized access to the users' wallets and successfully stole assets, amounting to a staggering US$8 million in Bitcoin and EtherFake Blur airdrop websites also stole US$300,000 by directing users to download a wallet app that was, in reality, a phishing tool designed to steal their assets.


To mitigate security risks associated with the claim process, the best practice is to airdrop tokens directly to eligible wallets, thereby avoiding scams and other security issues that may arise during the claim process. Effective communication of airdrop plans by protocols and decentralized apps to the community from the outset is crucial for understanding and preventing misunderstandings. 


To enhance wallet security during DeFi token airdrops, it is advisable to employ a two-tiered approach with a hot wallet for testing new protocols and a cold wallet for safeguarding the main portfolio. This segregation of assets provides an added layer of protection, ensuring that even if a malicious site is accessed, the primary portfolio remains secure. It is important to remain vigilant, connect wallets to known domains, claim airdrops from verified contracts on platforms like Etherscan, and employ multi-factor authentication, strong passwords, and other security measures to enhance wallet security. Using hardware wallets and enabling notifications for all wallets used are additional measures to consider.


As the DeFi ecosystem continues to grow and mature, security must remain a top priority. Token airdrops can be an effective way to introduce new projects and incentivize participation, but they also present significant security risks to users' wallets. By prioritizing security, the DeFi community can unlock the full potential of this space and provide users with the confidence they need to engage in its offerings.