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The rise of decentralized finance or DeFi may pave the way for a completely decentralized financial ecosystem. However, given the innovative nature of DeFi, the industry is still evolving, so it is prone to many loopholes.
Unsurprisingly, one of the biggest challenges currently facing the DeFi field is security threats.This has become apparent because more DeFi hackers continue to wreak havoc The entire crypto community. Recently, the largest DeFi hacker attack occurred in the encryption industry. Poly Network hacking caused Remove $600 million and return it, From Binance Chain, Ethereum and Polygon Network.
In order to put this in perspective, CipherTrace, a crypto intelligence company, revealed in their latest “cryptocurrency crime and anti-money laundering” report that the DeFi hacker attack total By July 2021, it will reach 361 million U.S. dollars, accounting for three-quarters of the total number of hacking attacks in the entire encryption industry this year. This is an increase of 2.7 times over 2020. In addition, when the CipherTrace report was released, DeFi-related fraud accounted for 54% of the main cryptographic frauds. Compared with last year’s total of only 3%, this number is much higher.
DeFi hackers needed to help the industry mature
Unfortunately, some in the crypto industry believe that DeFi-related crimes will actually promote the development of decentralized finance.
For example, CipherTrace’s chief financial analyst John Jefferies told Cointelegraph that recent hacks and frauds will help DeFi in the short term: “If anonymous hackers can steal millions of dollars from unnamed victims, then it’s clear that the industry needs more Effective security control.”
Specifically, Jefferies explained that DeFi crime will accelerate the understanding of your customers or KYC, legislation on decentralized exchanges or DEX.Given the following facts, this is extremely important for regulators No KYC process required to access DeFi protocol.
The latest report of Merkle Science-a platform for predicting risk and intelligence- Detail Regarding the danger of not having KYC, he pointed out, “Anyone in any country can access the DeFi protocol without going through KYC-inadvertently providing illegal activities for bad actors to obtain financial services.” The report further pointed out that, “The lack of KYC also means that users usually need to over-collateralize to obtain services such as loans.”
In view of the “decentralized” nature of DeFi, KYC and anti-money laundering (AML), the regulations have not been activated. Unlike the centralized exchange (CEX), the DeFi protocol hopes to create an alternative to the traditional financial system by replacing intermediaries with smart contracts or self-sufficient codes embedded in the blockchain network. Therefore, decentralized exchanges do not have ownership of user funds at any time, which may eliminate the need for KYC or AML.
Despite this, some people will argue that the DeFi protocol is not actually decentralized. Lior Lamesh, the co-founder and CEO of cybersecurity company GK8, told Cointelegraph that although DeFi should be decentralized, it is not because the smart contract owner (the individual who uploads the DeFi protocol to the blockchain) can control the network According to Lamesh, this creates a greater security problem: “By destroying the private key of the smart contract owner, the entire economy of the protocol can be destroyed immediately. This is worse than attacking a single DeFi user, because it means attacking all at once. DeFi users.”
Jefferies further stated that most decentralized exchanges are decentralized in name only, and pointed out that many decentralized exchanges are centralized in nature. He believes that this will help to finally clean up DEX with KYC and AML policies:
“I believe that regulators support the goals of DeFi and DeFi, as well as the ability to create this new programmable currency with code. Many people in the US government believe that DeFi is a real innovation, and I hope this industry can achieve our goal of clearing imports and exports. It’s a ramp so that DeFi can flourish.”
However, this is easier said than done.according to Application radar, The total value locked in DeFi in the past year exceeded US$108 billion. The rise of DeFi is forcing regulators to implement guidance on money laundering, terrorist financing, and other illegal activities. The best example can be seen in the latest Financial Action Task Force (FATF), the updated guidelines for virtual assets and virtual asset service providers (VASP).
However, Merkle Science’s latest report pointed out that the structure of the DeFi platform makes it impossible for these ecosystems to determine the intermediary responsible for AML and KYC compliance. The document further pointed out that the challenges faced by the centralized VASP in updated travel rules will be more difficult for the DeFi ecosystem to comply with, because the guidelines were not created with DeFi in mind. Jefferies explained that FATF has been discussing the method of classifying DEX as VASP, but this consultation will not be completed until October this year, so travel rules may or may not apply to DEX.
Given the long-term challenges associated with implementing DeFi regulations, others in the industry believe that the rise of DeFi hacking will immediately sound the alarm for better security protocols.
Mitchell Amador, CEO and founder of Immunefi, a DeFi protocol bug bounty platform, told Cointelegraph that regulations will not have an impact on the future of DeFi. Instead, better security procedures are needed to reduce DeFi-related crimes. “You will still see hacking attacks, but these will become more difficult,” Amador said.
According to Amador, the latest Poly cyber hacker It shows that DeFi is still a new experimental technology, and there are huge risks in the management of financial assets. Therefore, Amador pointed out that it is not surprising that there are errors in the smart contract code, but these vulnerabilities must be prevented from moving forward:
“A key lesson here is that bug bounties are indispensable, otherwise hackers will continue to invade these systems. We saw Poly cyber hackers returning the stolen funds, but why didn’t he motivate him in the first place?”
Amador added that the DeFi hackers that are happening now are stimulating security: “The number of people discovering code vulnerabilities is increasing, and new security projects are under development. This is really a glimmer of hope here. I am optimistic that 12 from now on Within months, cryptocurrency and DeFi will be more secure.”
DeFi must slow down the development cycle?
Although DeFi hackers may not be preventable, it is clear that these vulnerabilities will lead to a stronger encryption ecosystem moving forward. This may come in the form of better regulations, stricter security protocols, or both.
At the same time, Amador believes that one thing is certain-DeFi builders must slow down the development cycle: “The code base is new or has not been well reviewed, so it is hurried to market.” Therefore, he believes that the DeFi project Very little time to run tests, review code, or even think like a real hacker: “Once we slow down the development cycle to review the code, we should see a sharp drop in the number of hackers, especially in the new protocol.”
The lack of supervision, the development of a security audit process, and the speed of innovation are challenges that must be overcome in the DeFi field. In particular, the speed of innovation is important because the DeFi space is still maturing, and the risks associated with these agreements must be carefully accessed.
Although these factors must be carefully considered, the Amador pointed out that the fast-paced nature of the cryptocurrency industry may pose challenges to slowing down the development: “Cryptocurrencies are developing so fast, so I’m not sure if this is realistic. But if you have one With a good team, you can usually resist stress and spend time building things correctly. This will ultimately save time and avoid security issues.”
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