Given that DeFi is heading towards mainstream adoption and the magnitude of recent attacks, security becomes a critical issue. As such, knowing DeFi hacks and exploits, what causes them, and how to prevent them is quintessential for those who wish to navigate the DeFi universe safely.
DeFi has come a long way from crypto, reaching new heights with decentralized applications (dApps) and decentralised exchanges. And, with the total value of locked assets throughout the DeFi universe being well over $50 billion, now is the time to act against DeFi hacks.
How Are Hackers Exploiting DeFi?
Hackers aim at potential vulnerabilities in DeFi, namely in what concerns 3 aspects:
- Its open-source code. In fact, the very same element which allows for a completely transparent DeFi environment can lead to hacks and exploits.
- Project launches: the restless demand pushes developers into releasing protocols at an unprecedented pace. This can occasionally lead to vulnerabilities or minor errors which hackers certainly are on the hunt for.
- Composability: DeFi protocols can also be exposed through this principle.
What Are the Most Common DeFi Hacks?
There are several DeFi hacks which should be known by the general public. We’ve highlighted 3:
1. Manipulating Oracles: Oracles, in simple terms, are feeding the network with external information. Hackers attempt to manipulate their smart contracts, usually exploiting token prices or other token details.
2. Logic errors: A smart contract will run whatever it is programmed to do. They run on open-source code, so if an error, glitch, or vulnerability is found, it can certainly be exploited.
3. Re-entrancy attacks: these types of attacks are usually related to having a smart contract connect to another external element (usually a contract) which cannot be trusted.
Tommy Deng, managing director of blockchain security firm Beosin, said while DeFi protocols will continue to strengthen and improve security, he also admitted that “there is no absolute security,” stating:
“As long as there is interest in the crypto market, the number of hackers will not decrease.”
Deng added that many new DeFi projects “don’t go through complete security testing before going live."
Deng’s comments mirror those of blockchain security firm CertiK, which told Cointelegraph on Jan. 3 that it doesn’t “anticipate a respite in exploits, flash loans or exit scams” in the coming year.
DeFi is a promising technology with numerous advantages over traditional finance. However, as with any technology, DeFi faces security challenges that must be addressed in order to maintain user trust and confidence. DeFi's security challenges include smart contract vulnerabilities, hacks, exploits, a lack of regulation, centralization, and user error. Code audits, bug bounties, decentralization, regulation, and education are some solutions to these problems.
DeFi applications can improve their security and reduce the risk of financial losses and reputational damage by implementing these solutions. As DeFi grows and evolves, it is critical that the security challenges are addressed to ensure the technology's long-term viability and success.
Finally, DeFi provides many advantages to users, including decentralization, transparency, and trustlessness. However, DeFi faces security challenges that must be addressed in order to maintain user trust and confidence.
DeFi applications can improve their security and reduce the risk of financial losses and reputational damage by implementing solutions, such as code audits, bug bounties, decentralization, regulation, and education. As DeFi evolves, it is critical that security challenges are addressed to ensure the technology's long-term success.