Recent Hacks in the Crypto and Defi Spaces Show the Security Loopholes

Over the past year, we have seen a massive jump in activity and value for the crypto and decentralized finance (DeFi) spaces.

For the crypto industry, 2021 was a tremendous step forward – the market hit a total value exceeding $3 trillion this year. Even though the number dropped towards the end of the year, investors are optimistic about the future.

Top cryptocurrencies had massive gains in 2021 as well, and we saw growth in institutional adoption. Bitcoin Treasuries data shows that over $54 billion in Bitcoin is held by public companies alone. When you add up the amount held by whales in private wallets and high-net-worth individuals, we could easily be talking about hundreds of billions of dollars.

As for the DeFi sector, it kept growing as well, reaching $274 billion in assets locked in DeFi protocol. This is a far cry from the $38 billion that the industry had in total value locked (TVL) at the start of the year. All of these metrics prove significant growth of the industry and the expansion of opportunities across different fields.

However, despite this jump, many experts agree that crypto and DeFi are still in their early days. The Bitcoin whitepaper itself is just 13 years old – a baby, compared to the traditional financial industry, which was formed centuries ago.

Similar to other early-stage industries, DeFi has faced several considerable challenges. One of them is the security issue that’s become acute in recent years. The thing is that DeFi protocols still experience frequent hacker attacks that lead to significant losses.

Progress Being Made, But More Work to Be Done

To be fair, hacks were reduced for a while. In 2020 alone, there was a massive drop in the number of blockchain and crypto-related data breaches worldwide.

Heading into 2021, many believed that the DeFi space had outgrown these security issues. Everyone was more focused on the promising companies and projects that would be launched during the year, and no one particularly was concerned about security breaches.

However, 2021 wasn’t as smooth and easy as everyone anticipated. If anything, it showed us that the market needs to tighten up on security, or hacks will continue to happen.

To give you an idea of the current state of affairs, let’s take a look at the events of December 2021.

BitMart, an up-and-coming crypto exchange, was hacked at the beginning of the month. The company explained that hackers had exploited its Ethereum and Binance Smart Chain wallets, stealing $150 million. Yet, some reports assume that the hackers’ total haul was somewhere closer to $200 million.

Days later, another hack was reported. This time, it was AscendEX – a crypto trading platform. AscendEx reported that it lost $78 million following an attack on its wallets hosted across three separate chains – Ethereum, Binance Smart Chian, and Polygon.

Then, another DeFi protocol was hacked. Just a few days before Christmas, Grim Finance announced that it had lost $30 million due to a security breach. In its statement, Grim Finance explained that an external hacker had exploited its vault contract through five reentrancy loops. This allowed them to fake five deposits into the vault, while the platform was still processing the first one.

Security Issues in DeFi

Even though DeFi has significantly progressed since its early days, there are still several critical security risks identified by Blaize. Security, a smart contract auditing company. These include:

• Smart contract faults. Vulnerabilities in smart contracts can easily lead to hacks in the future. We’ve seen this happen over and over again.
• Wrong liquidity pool estimates. If the value of tokens in a liquidity pool is calculated incorrectly, attackers can capitalize on these discrepancies to launch flash loan attacks.
• Compromised private keys. Users being a bit too carefree with their wallets’ private keys can lead to security breaches and huge monetary losses.
• Frontrunning attacks. In the time gap between transactions are created and recorded on the blockchain, hackers can launch front-running attacks to compromise them.
• Smart contract logic faults, inefficiently implemented access control, Ponzi schemes, and more.

The Solution: A More Thorough Security Infrastructure

If DeFi protocols aim to reach their full potential, their security infrastructure must be impeccable. High-class tech solutions, experienced developers, and regular audits – everything needs to work together to ensure that user funds and data are as safe as possible.

We have already seen a couple of promising projects doing a good job when it comes to security. One of them is DeHive – a company offering yield-generating cryptocurrency indexes that represent the best-performing tokens of a particular market segment. DeHive has the potential to be one of the hottest yield-farming protocols on the market, but its approach to security deserves special mention here.

The DeHive protocol is managed entirely by a smart contract, which means that the company itself doesn’t have access to users’ funds. This is a reasonable and highly secure solution, which allows DeHive users to have full control of their funds, compared to assets stored on other protocols. Moreover, DeHive smart contracts have been repeatedly checked by leading auditing companies to ensure the highest-level security.

When it comes to protocol security, DeHive can serve as a role model for many other projects in the DeFi space. Providing a comfortable and safe environment for users is essential to develop a world-known project and move the industry forward.

Conclusion: Security as a Subject in 2022

It goes without saying that in 2022, a lot of DeFi projects need to focus more on their security and how to protect users in case of a potential hack.

Developing hi-tech solutions is essential, but as we advance the technology, bad actors create new approaches and ways to hack DeFi protocols. That’s why we should put safety first, and while making DeFi accessible to more people, get things right from a security standpoint. Everything has to be flawless from audits to asset storage to authentication and administrative access.