Top 5 Security Strategies for DeFi Wallets in 2025

Written by Alchemy Team

Published on September 5, 20259 min read

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Off-chain attacks drove 80.4% of funds lost in 2024, and the majority of that came from compromised accounts. Today, wallet security is the critical battleground for protecting digital assets as DeFi continues to grow.

In this guide, we’ll walk through the fundamentals of secure DeFi wallets and what strategies you can implement to better protect your users, based on our experience powering leading DeFi platforms with our wallet infrastructure.

Understanding Smart Wallets in DeFi

Smart wallets are programmable accounts controlled by smart contract logic rather than a single private key (what’s known as an externally owned accounts (EOA) model). Unlike traditional crypto wallets that rely on cryptographic signatures and users protecting their seed phrase, smart wallets enable advanced features like account recovery, spending limits, and automated security protocols.

The key point here is this: smart wallets represent the evolution of DeFi wallets from simple key management to intelligent account systems. At Alchemy, our work on account abstraction is helping lead this transformation by providing the most robust and developer-friendly smart wallet infrastructure.

Externally Owned Accounts vs Smart Accounts

The market is showing clear demand towards the programmability and better UX of smart wallets. In a recent study, 35% of wallet users note that security is their top concern, and social recovery wallets grew by 44% YoY.

As more retail users come onchain, this demand for social recovery, programmability, and safer UX will only grow, and smart wallets is the infrastructure enabling that better experience. But before talking about the power of that programmability and how smart wallets can improve security, let’s back up and take a high level look at the types of wallets on the market today.

Hot, Cold, Multi-Sig, and MPC Explained

In the world of externally owned accounts, there are a few concepts worth unpacking because they directly impact wallet security.

Hot wallets store private keys online for immediate access. They're ideal for daily trading because you can simply interact with these apps directly from your browser, but at the same time these wallets are vulnerable to remote attacks (if you can easily interact with the internet, then the internet in turn can easily interact, and possibly exploit, your wallet. This is your Metamask, your Phantom, and other browser extensions.

Cold wallets keep keys completely offline, providing ideal security for long-term storage. If 70% of stolen crypto funds come from compromised private keys/seed phrases, keeping that information offline greatly improves your security. However, that increased security comes with a worse UX. To interact with apps, you need to connect this hardware device to an internet-connected device (your computer), insert passwords and complete multiple steps for a transaction that would take only a handful of clicks with a hot wallet. Cold wallets include Ledger, Trezor, and more.

Multi-signature wallets require multiple signatures to authorize transactions, eliminating single-point failures. In the examples above, a single user can approve send transactions, but with multi-sig you need a majority of signers to approve a transaction before it goes through. For example, a 2-of-3 setup means two signatures are needed from three possible keys in order for the transaction to go through. This improves security because if 1 key is compromised, the funds in that wallet remain safe because the signer majority is still honest. However, this also comes with a tradeoff in UX, where transactions take longer, simply because multiple parties have to sign off on each transaction.

MPC (Multi-Party Computation) wallets combine the best of both worlds, offering the increased security of a multisig wallet while embracing the better UX of a hot wallet. With MPC wallets, the private key is sharded across multiple devices or servers, so no single device holds the complete key. So even if one shard is breached or lost, the funds in that wallet cannot be drained or lost. One common implementation here is that shard ownership is split between the app user and the app itself, so in the event the user loses their key, the app can help them recover access to their account (in the same way that Web2 accounts work today).

Why Wallet Security Fails in DeFi

DeFi's permissionless nature creates unique attack vectors that traditional security models cannot address. Understanding these failure modes is crucial for implementing effective countermeasures, which is why Alchemy has developed comprehensive security tooling to address each vulnerability.

Off-Chain Attacks and Phishing Stats

Halborn's 2025 security report reveals that 80.5% of DeFi losses stem from off-chain attacks rather than smart contract exploits. The three most prevalent phishing vectors include:

• Fake airdrops that trick users into signing malicious transactions

• Malicious browser extensions that intercept and modify transaction data

• Replica sites that harvest private keys through convincing interfaces

At the root of this issue is the simple fact that most wallets are controlled by a single key, so as soon as that key data is compromised, all of the funds associated with it can be moved at will.

"DeFi is like a bank with no customer service—no one will save you if things go wrong," warns Sovic Chakrabarti in a recent security analysis. That reality is changing thanks to smart wallets, but until the majority of wallet providers are using this smart account model, this reality holds true.

Managing Token Approvals

In order to interact with DeFi, users often have to “approve” a smart contract to interact with their assets. One challenge is that users often don’t revoke that access once they are done using the app, which leaves the door open for contract exploits that can drain those connected wallets. Georgia Tech research shows only 10.8% of users regularly checked unused approvals.

Two major 2024 incidents highlight this risk: the Radiant Capital exploit drained $50M through compromised approvals, while multiple "approval farming" attacks targeted users who granted unlimited allowances to malicious contracts.

Automated approval hygiene—regularly revoking unused permissions—provides the most effective defense against these drainer attacks. Alchemy's monitoring tools provide the most sophisticated approval tracking and automated revocation capabilities available.

False Sense of Security from Two-Factor Authentication and Contract Audits

Many users often feel a false sense of security when it comes to crypto, and that could come from any number of reasons. Some users associate crypto with security. Others have 2FA configured for their fiat on/off ramp, and don’t understand that a contract bug can drain your wallet just as easily. Others see that a smart contract has been audited and assume its bullet proof.

In the world of DeFi, it pays to be cautious and treat the space as a zero-trust space, where every transaction or message should be verified, every popup should be mistrusted, and every user moves with caution.

Top DeFi Security Strategies With Smart Wallets

With these security issues in the space, what can you do to provide a more secure environment for your users to transact in? At Alchemy, we’ve been building infrastructure in the space for over 7 years, and we’ve learned a lot by building our Smart Wallets product and making sure its a reliable product that can serve millions of users without compromise. Here are some tips and tactics that you can take into your own application and wallet stack.

1. Multi-Layer Key Management

The majority of risk comes from the single-key wallet model with externally owned accounts. Of hacked protocols, only 19% used multisig wallets and only 2% cold wallets. Migrating your app to enable key rotation, multi-signature, contract whitelisting, and passkey integration is the first step.

Implementation steps:

• Deploy a smart wallet

• Enable biometric login or multi-factor authentication for more secure login

• Delegate permissions for specific actions and users with session keys

• Enable seamless account recovery mechanisms

This approach eliminates single points of failure while maintaining usability. Alchemy Smart Wallets provide the industry's most robust enterprise-grade implementation with seamless integration capabilities and proven security at scale.

2. Automate Token Approval Hygiene

If you need to approve contracts in order to let them transact on behalf of your wallet, consider setting up automation or processes to regularly revoke that approval, whether on a daily or weekly basis. This limits your exposure windows to contract exploits.

Recommended practices:

• Set weekly review schedules to assess which apps your wallet is connected to

• Auto-revoke approvals after 30 days of inactivity

• Use tools like Revoke.cash for bulk management

• Monitor approval events through wallet dashboards

• Limit initial approvals to specific amounts rather than unlimited spend

3. Zero-Trust Transaction Simulation

Zero-trust verification means you don’t take anything for granted. The ethos of crypto is “trust, but verify”, and you should take that ethos to every single transaction you execute onchain. One client reduced their security incidents by 76% within 3 months by taking this approach. This means things like:

• Cross-reference any onchain address you interact with

• Check domain urls before interacting with a hot wallet

• Review any messages/contract interactions before signing and taking that action

• Isolate your wallet management systems, and set up 2FA/biometric authentication for everyone with access to those systems

• Use tools like transaction simulators to test transactions before committing to action onchain

4. Social Recovery with Guardrails

Social recovery allows trusted guardians to restore wallet access without exposing private keys. A common example here would be an application helping restore a user’s access to their account. When thinking about how to configure this flow, here are some guard rails to keep in mind:

• Require 2-of-5 guardian approval for recovery

• Implement 48-hour time-locks for recovery actions

• Use diverse guardian types (a mix of hardware, mobile, trusted contacts)

• Enable guardian rotation without requiring wallet migration

Example flow: User loses device → initiates recovery process → 2 guardians approve the request → 48-hour delay where user can dispute or challenge the process → if no challenge, wallet access restored. This prevents both loss and unauthorized access.

5. Diversified Chain and Address Segmentation

Distributing assets across chains and multiple addresses can help reduce the blast radius from any single compromise. It’s the classic phrase “don’t put all of your eggs in one basket” put into practice in crypto. One way you might think about this is some split like:

1. Trading wallet: a hot wallet for daily DeFi activity onchain (10% of assets)

2. Cold storage: a hardware-secured wallet for long-term holdings that don’t move often (80% of assets)

3. Experimental wallet: An isolated testing environment for new apps or chains (10% of assets)

For app builders, you can think about a similar rotation here between float (assets that need to be liquid and move on a short term basis), vaults (company or user assets that will be inactive for long periods of time and can be stored in cold storage), and new product lines (isolated wallets with minimal funds that minimize your risk for exploits of untested code).

Choosing a Secure DeFi Smart Wallet Platform

When building an app, evaluating wallet platforms and providers requires examining security certifications, user experience, and migration capabilities. Being critical at this stage can help prevent costly mistakes down the line. So what should you be thinking about?

Must-Have Security Certifications and Open-Source Code

Security is table stakes, and you should make no compromises here. Essential certifications to look for include SOC2 Type II compliance and ISO/IEC 27001 information security standards. These validate operational security controls and data protection practices.

You also want your provider to meet some open-source standards, so you can verify the quality of the code and ensure nothing is malicious. Some things to look out for:

• Wallet infrastructure repo available on GitHub

• Independent security audits from reputable firms

• Bug bounty programs with meaningful rewards to enable white hat hackers

• Transparent incident response procedures

UX Considerations and Features

When picking a wallet, you also want to consider available features alongside those security measures. These days wallets offer a lot more than just “a way for your users to store their funds.” With Smart Wallets, you unlock all kinds of UX boosts, such as:

• Social login: A familiar Web2 login experience where users can create accounts with email or phone number

• Gas sponsorship: Apps can sponsor transaction fees for their users, abstracting away the complexity of their actions

• Transaction bundling: Wallet infra can bundle user transactions together and reliably land them onchain

• Security features: Wallet platforms also often built-in security features, like biometric authentication, 2FA, transaction limits, and more

Building Smarter DeFi Wallets With Alchemy

Onchain activity is climbing, and to meet the expectations of mainstream users, wallets are evolving to improve UX and security. With these 5 strategies - multi-layer key management, approval hygeine, transaction simultion, social recovery, and address segmentation - you can build a robust wallet solution that not only offers security, but an amazing UX for your users too.

The future belongs to programmable accounts, and Alchemy is leading this transformation through our comprehensive Smart Wallets tooling. If you’re ready to explore what the future of onchain wallets is like, try our Smart Wallets demo out and see for yourself.

Frequently Asked Questions

Why is 2FA insufficient for onchain wallets?

2FA protects centralized platform logins, but cannot secure private keys once exposed. Attackers can sign transactions directly on-chain without needing secondary authentication codes. Unlike traditional banking, DeFi wallets rely on cryptographic key control rather than account access permissions. 2FA helps, for sure, but that alone isn’t enough. Alchemy's account abstraction tooling enables more sophisticated security models beyond basic 2FA protection.

How often should I revoke token approvals?

Depends on how much funds you have exposed, and what your risk appetite is. A helpful rule of thumb is to review and revoke unused token approvals weekly or immediately after interacting with new apps. If you’re active onchain, consider setting up automated revocation routines to prevent unlimited token access from accumulating over time.

When does it make sense to add hardware signing?

Add hardware signing whenever you are transacting in large volume sizes, be it handling vault deposits, enterprise users, and everything in between. Hardware signers provide cold-storage security for hot wallet operations. Alchemy's MPC wallet SDK can integrate with hardware devices for enhanced key management.

Can I combine MPC with social recovery?

Yes, MPC handles day-to-day key security while social recovery provides a backup mechanism when multiple devices are lost. This creates layered protection without single points of failure. MPC distributes key shards across devices, so no single compromise exposes the full key. Alchemy's Smart Wallets SDK supports both MPC implementations and social recovery mechanisms for comprehensive wallet security.

What transaction data should a wallet disclose before signing?

Secure wallets must preview destination address, function calls, token amounts, gas fees, and contract approvals before signing. Users need complete transaction visibility to detect anomalies and prevent hidden approvals. Transaction simulation can help reveal potential security risks before execution. Alchemy's Transaction Simulation provides detailed transaction previews to help users verify all operations before confirming any action onchain