Decentralized Finance or ‘DeFi’ as it is commonly called, refers to financial services that utilize technologies such as blockchain. The recent boom behind DeFi is largely based on the same promises being made by blockchain for years now – transparency, open source, borderless, permissionless.
Some of the implementations of technology currently capturing the attention of the market include,
- Lending Platforms
- Prediction Platforms
- Decentralized Exchanges
Unfortunately, any time there is a large amount of hype around a new technology or service, there will be well-intentioned, but ill-informed market participants. As a result of this, companies offering said services often become the victim of hacks, and thereby market participants that entrusted them with their funds.
The following are only a few of the various examples in recent months where this has occurred.
This young company is actively building its suite of services which allow for the creation of decentralized e-commerce stores, underpinned through its stablecoin OUSD.
Origin Protocol has just announced on November 17th, that it has become the latest DeFi project to be the victim of a hack – which has resulted in the loss of at least $7 million USD.
“OUSD has been hacked, and there has been a loss of user funds. We are actively investigating the issue. We are committed to making things right.”
Lending/borrowing, savings accounts, and customizable decentralized autonomous organizations (DAO) – each of these are financial services offered by a company known as Akropolis.
On November 12th, Akropolis suffered a theft amounting to roughly $2 million USD.
“At ~14:36 GMT we noticed a discrepancy in the APYs of our stablecoin pools and identified that ~2.0mn DAI had been drained out of the yCurve and sUSD pools…These pools had been audited by two independent firms, however, the attack vectors used in the exploit were not identified in either audit. The essence of the exploit in question is a combination of a re-entrancy attack with dYdX flash loan origination.”
While its services are various, Value Protocol is most known for its ‘Value Vaults’, which act as a yield-farming aggregator.
On Nov. 14th, Value Protocol was the victim of yet another attack, resulting in the loss of user funds.
“On Nov 14th 2020 at 03:36:30 PM UTC, a hacker performed a flash-loan exploit on the MultiStables vault of ValueDeFi protocol, which resulted in a net loss of roughly 6mil$.”
Method of Attack
Interestingly, in each of the cases above, a similar method of attack was used. Known as a ‘flash-loan’, hackers would take out significant loans in a particular asset, large enough to swing its market price. The attacker would then use the funds from the loan to re-purchase the asset at devalued prices. Upon doing so, the attacker will pay back the original loan, netting a significant profit.
Due to the issues surrounding DeFi, figure heads within the industry appear split on whether the potential of DeFi is real, and/or enough to overcome the potential bubble which has formed.
Binance CEO, Changpeng Zhao, maintains a positive attitude, stating,
“I think some of the pro-innovations will remain. The liquidity providers, “profitable farming,” now provide a high annual percentage of income. It may not last very long…Companies create new tokens, issue them as a reward. This is not a long-running story. But I think DeFi is here to stay. Even now, with Bitcoin’s popularity rising again, DeFi is still popular. We think there is a lot of growth potential in DeFi.”
Economist, Nouriel Roubini, who is notoriously ‘anti-blockchain’, has taken a differing stance, likening DeFi to vapourware.
“DeFi was vaporware from its onset. Now totally faltering as blockchain was always the most over-hyped technology in human history.”
A Dangerous Place to Be
If the message from the aforementioned examples isn’t clear yet, it is this – DeFi is a dangerous place to be right now. The amount of hype surrounding what often amounts to simply a ‘buzzword’, has resulted in a growing amount of hacks.
Combined with the rapid growth of DeFi and these hacks, the sector is unsettlingly reminiscent of the 2017 ICO boom, in which markets were flooded with similar issues. While DeFi may hold limitless potential for the way we view finance, be careful when jumping into the fray.
If the money lost through hacks isn’t scary enough, maybe the growing number of scams will be to ward of uneducated investors.
For a more detailed look at what DeFi is, and what it has to offer, make sure to peruse our ‘DeFi 101’ article HERE.