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Cracking the Vault: Real-World Crypto Wallet Exploits and Defense Strategies

As blockchain ecosystems continue to scale and crypto wallets evolve into high-value digital vaults, threat actors are adapting with increasing sophistication. In February 2025, the Lazarus Group executed one of the most consequential cyberattacks in the crypto industry, siphoning over $1.4 billion in ETH from Bybit via its external wallet infrastructure. This breach exposed critical architectural vulnerabilities in multisignature logic, key management protocols, and internal operational controls.

This paper presents a comprehensive exploration of crypto wallet security, beginning with foundational concepts in blockchain architecture and wallet classifications—custodial vs. non-custodial, hot vs. cold—and progressing into the mechanics of smart contracts and multisignature (multisig) wallets. It highlights common implementation pitfalls that often go unnoticed during wallet development.

The threat landscape is examined through the lens of advanced persistent threats (APTs), with a focus on the Lazarus Group’s evolving tactics. These include phishing, social engineering, and supply chain compromise, which enable attackers to escalate from endpoint intrusion to smart contract exploitation. A detailed narrative reconstruction of the Bybit 2025 breach reveals how gaps in multisig authorization, backend misconfigurations, and key custody failures enabled a full compromise.

To ground the analysis in practice, the paper includes a live simulation of a vulnerable multisig wallet. `This simulation demonstrates unauthorized owner injection, fund exfiltration, and laundering techniques—mirroring real-world attacker behavior as observed during the 2025 Lazarus Group cyberattack on Bybit.