Tag: breach

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These are trying times in the world of decentralized finance, a blockchain-based system of banking and investment that seeks to cut out traditional middlemen and avoid regulatory entanglements.

In just the last 4 weeks, Curve Finance, a popular cryptocurrency exchange, was hacked for over $70 million after a bug was discovered in its coding language; a crypto lender called Exactly lost $12 million in a security breach; and smaller projects Saddle Finance, Spirit Swap and Hundred Finance abruptly closed.

Hacks, once considered no more than sporadic disruptions, have plagued decentralized finance platforms. Between January and July, the crypto industry saw 145 major hacks—117 of them were DeFi-related and totaled approximately $700 million in losses, according to Kim Grauer, director of research at Chainalysis, a blockchain intelligence company….Continue reading….

Nina Bambysheva

I report on all things crypto and oversee the Forbes Crypto Confidential newsletter and the annual Forbes Blockchain 50 list that features billion-dollar leaders in distributed ledger

Source: Why DeFi’s Woes May Be Existential

Critics:

Due to a lack of KYC processes, and no way to revert a transaction, users are at a loss if they are ever hacked for their passwords or private keys. Additionally, liquidity providers staking in DeFi protocols can suffer what is called an impermanent loss if, when withdrawn, the token pairs they have invested have altered in value ratio significantly.

Although liquidity pool DEX are the most widely used, they may have some drawbacks. The most common problems of liquidity pool DEXes are market price impact, slippage, and front running.Price impact occurs because of the AMM (Automated Market Makers) nature itself — the larger the deal, the stronger impact it has on the price.

For example, if the constant product AMM is in use, every deal must keep the product xy = k constant, where x and y are quantities of two cryptocurrencies (or tokens) in the pool. Price impact is non-linear, so the larger is the input amount Δx, the lower is the final ratio y / x that gives an exchange price. The problem is mostly significant for relatively large deals versus the liquidity pool size.

Front running is a special type of attack in public blockchains when some participant (usually a miner) seeing an upcoming trading transaction puts his own transaction ahead (playing with a transaction fee for example), making the initial transaction less profitable or even reverted. To provide some protection against front running attacks, many DeFi exchanges offer a slippage tolerance option for end-users.

This option serves as a safeguard, allowing users to set a limit on the worst acceptable price they are willing to accept from the time of transaction signing. A decentralized exchange can still have centralized components, whereby some control of the exchange is still in the hands of a central authority. The governance of a DeFi platform, typically as part of a Decentralized Autonomous Organization, is done through tokens that grant voting rights and are distributed amongst participants.

However, the majority of these tokens are often held by few individuals and are rarely used to vote. In July 2018, the decentralized exchange Bancor was reportedly hacked and suffered a loss of $13.5M in assets before freezing funds. In a Tweet, Charlie Lee, the creator of Litecoin spoke out and claimed an exchange cannot be decentralized if it can lose or freeze customer funds.

Operators of decentralized exchanges can face legal consequences from government regulators. One example is the founder of EtherDelta, who in November 2018 settled charges with the U.S. Securities and Exchange Commission over operating an unregistered securities exchange.

Coding errors and hacks are common in DeFi. Blockchain transactions are irreversible, which means that an incorrect or fraudulent DeFi transaction cannot be corrected easily. The person or entity behind a DeFi protocol may be unknown and may disappear with investors’ money. Investor Michael Novogratz has described some DeFi protocols as “Ponzi-like”.

DeFi has been compared to the initial coin offering craze of 2017, part of a cryptocurrency bubble. Inexperienced investors are at particular risk of losing money because of the sophistication required to interact with DeFi platforms and the lack of any intermediary with customer support. On the other hand, as the code for DeFi smart contracts is generally open-source software that can be copied to set up competing platforms, experienced users and user-created bots might create instabilities as funds shift between platforms which share the same code.

In addition, DeFi platforms might inadvertently provide incentives for cryptocurrency miners to destabilize the system. In 2021, half of cryptocurrency crime was related to DeFi. This rise has been attributed to a combination of developer incompetence and non-existent or poorly enforced regulations. Theft from DeFi can come from either external hackers stealing from vulnerable projects, or “rug pulls”, where the developers and influencers promote a project and then take the money, as a form of Pump & Dump….

Related contents:

• “Why ‘DeFi’ Utopia Would Be Finance Without Financiers: QuickTake”.
• Decentralized Finance: On Blockchain- and Smart Contract-Based Financial Markets”.
• “‘DeFi’ movement promises high interest but high risk”. 
• “Boom or bust? Welcome to the freewheeling world of crypto lending”.
• Decentralized Finance”.
• The Maker Protocol: MakerDAO’s Multi-Collateral Dai (MCD) System”.
• “Why ‘DeFi’ Utopia Would Be Finance Without Financiers: QuickTake”. 
• Digital Assets and Blockchain Technology: US Law and Regulation.
• What’s ‘Yield Farming’? (And How Do You Grow Crypto?)”.
• “Crypto Is Beating Gold as 2020’s Top Asset So Far”.
• Coders Flock Back to Crypto Projects With Prices Surging Again”. 
• “Novogratz Plows Ahead In DeFi Amid the ‘Gamifying’ of Crypto”. 
• A three-way fight to shape the future of digital finance has begun“,
• Decentralized Finance (DeFi): An Emergent Alternative Financial Architecture.

• “Crypto Exchange Gets Millions After Copy-Paste of a Rival’s Code”.
• Crypto wallet MetaMask finally launches on iOS and Android, and it supports Apple Pay”. 
• “MetaMask’s Blockchain Mobile App Opens Doors For Next-Level Web”.
• “Boom or bust? Welcome to the freewheeling world of crypto lending”.
• Blockchain smart contracts are finally good for something in the real world”. 
• “Flash Loans Are Providing Instant Cash to Crypto Speculators”. 
• “DeFiance: billion dollar finance, million dollar hacks, and very little value”.
• DeFi Boom Makes Uniswap Most Sought-After Crypto Exchange”.
• “Regulatory Clarity for Crypto Marketplaces Part I: Decentralized Exchanges”. Cato Institute.
• Coinbase bought a “decentralized” crypto exchange. How does that work?”.
• This 31-Year-Old Is Trying to Revolutionize Cryptocurrency Trading”. 

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