DeFi Hacks Continue: Does Hope Hold Enough for Investors Not to Give Up
According to a crypto research company report, the DeFi sector lost almost $300 million to various attacks and exploitations in 2019. Due to the anonymity of these systems, they can be easily hacked and exploited. All this, without the knowledge of their users. In the first four months of 2021, the total losses reached $240 million.
DeFi Crime is on the Rise
While hacking is more common among cybercriminals, social media influencers have been getting involved with rug pull scams and manipulating their audiences. Marketing plays a vital role in rug pull scams because it draws in many investors and drives the price up. Social media and influencers are often how developers of such projects advertise their tokens to an unsuspecting audience.
A lot of DeFi protocol hacks are performed due to coding mistakes. Unfortunately, many blockchain project owners don't perform security audits or even conduct smart contract security checks.
Another form is the smart contract logic which is a step beyond the standard code vulnerability. It involves carrying out a smart contract trial that will most likely prevent an attacker from seeing it. Generally, an inexperienced developer or auditor may not be able to detect issues in a DeFi network due to their lack of experience in financial instruments.
Critical private ownership is an important subject to keep in mind. The project owner creates it, and anyone who has access to it should not give it to anyone. Hence, when a hacker gets hold of this information, they can easily have complete control over the target.
DeFi Hacks are the Key to Sector Maturity
Even though unfortunate, the larger crypto community believes that DeFi-related crime is the way for the sector's maturity. For example, this sector needs better security controls if anonymous hackers can take millions of dollars from unnamed victims.
KYC
Defi crimes have the potential to accelerate the Know Your Customer (KYC) legislation for decentralized exchanges. It is essential since the protocols are accessible without checks and balances.
A report by a predictive risk and intelligence platform Merkle Science stated that not having a KYC is a dangerous practice. It could enable bad actors to access financial services easily. Not having a proper KYC can also lead to users unknowingly accessing non-sanctioned transactions.
Decentralized Nature
Due to the decentralized nature of DeFi, regulations are not enabled. Instead, DEXs are expected to replace intermediaries with smart contracts or self-sufficient code. It eliminates the need for both KYC and AML. Although it's widely believed that DeFi is decentralized, Lior Lamesh, the CEO of GK8, argued that it's not decentralized. Due to this, Lamesh explained that the potential for exploitation of a smart contract's private key is much more significant than just hacking a single user.
Regulatory Bodies
The rise of digital currency and related transactions, or DeFi, has raised concerns about money laundering and terrorism financing. Due to the increasing number of transactions, various regulatory bodies have started implementing guidance against these activities.
According to a new report by Merkle Science, the complexity of DeFi platforms' structure makes it difficult for them to identify and implement robust AML and KYC compliance programs. Also, the proposed Travel Rule will make it harder for them to comply with.
Due to the complexity of implementing DeFi regulations, security experts believe that the rise of attacks will compel organizations to improve their security protocols.
Is the Move too Fast?
While it is impossible to prevent DeFi attacks, they will likely result in a more robust cryptocurrency ecosystem. It could mean better regulations and security protocols.
Developers of DeFi projects may need to slow down their development cycles to avoid getting bogged down in codebases that are not well-reviewed. This move could result in a significant drop in attacks.
The lack of regulation and the development of security audit processes for the DeFi space are some factors that need to be addressed. They will, hence, enable the industry to move forward. However, there is an issue. The rapid growth of the cryptocurrency industry can create challenges in slowing down development. Having a great team can help you avoid getting bogged down in technical issues and build things correctly.
Curbing Attacks
DeFi founders could take several measures to enhance security on blockchain and DeFi platforms. One of the most obvious ways to test the platform is through a testnet, which would allow the developers to refine the code before it's released. This method would allow them to conduct more rigorous tests and avoid making the platform public.
Many project development teams do not have the necessary resources to leverage the skills of their users. Offering rewards to those who identify security weaknesses in the code is a powerful way to encourage people to participate in the project.
The project's metric monitoring tools are an excellent resource to identify suspicious activities. For instance, sudden spikes in the values of pool funds can indicate the onset of a cascade effect or an impending hacker attack.
Notably, having the necessary tools can also help prevent security breaches. Aside from having a good foundation, having the required software solutions also helps minimize risk.
Author Thoughts
In the crypto industry, cybercriminals thrive by hacking less secure DeFi projects or by engaging in rug pull scams. The establishment of security and business regulations is essential for the legitimacy of DeFi. Blockchain networks are, however, still lagging in security despite almost a decade of operation online.
As for the investors, they could hold out and remain in the DeFi sector due to its advances and benefits. Furthemore, DeFi is still developing and the hacks are contributing to the maturity of the sector. However, they have to be vigilant and do research before investing in the DeFi sector.