DeFi trading guarantees a high level of transparency for many users and easy requirements for joining. All this is the reason for the rapid growth of DeFi.
It should be understood that the rapidly growing DeFi market is attracting more and more attackers who will try to steal the data of other DeFi users. According to 2021 data, in the first half of the year, DeFi hacks accounted for more than 70% of major hacks in the world of cryptocurrencies and compared to 2020, the risks of being hacked increased three times.
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For this reason, security is a hot topic for many DeFi users. A detailed overview of the risks associated with DeFi can help you learn how to protect your access and avoid being targeted by hackers.
What are the Security Risks in DeFi?
DeFi has shown significant growth over the years, with the total value locked in DeFi protocol as of August 2021 being over $70 billion. However, it is essential to understand that this kind of money turnover in this environment attracts many scammers, so identifying the risks will help you implement adequate security measures for large-scale investments in DeFi protocols. Below are some DeFi risks you should be aware of to protect yourself.
1) Wrong Liquidity Pool Estimates
The most prevalent problem leading to security risks is the miscalculation of the value of tokens in the liquidity pool. In short, DeFi users invest their tokens in a liquidity pool, after which they receive a share. This helps them get profits in the future. Liquidity pools evaluate the value of the tokens in the pool according to the existing composition of the pool.
Because of this mismatch, hackers can carry out one of the most common attacks – the flash loans attacks. They can introduce even more imbalance into the pool for the duration of the attack. The trick is that an unbalanced pool can lead to the incorrect calculation of token values. This helps hackers change the value of the collection.
2) Front running Attacks
Preemptive attacks are another type of DeFi risks. The fact is that after the transactions are completed, they are not immediately added to the distributed ledger of the blockchain. However, all transactions must be on the entire blockchain network once created. Thus, transactions are stored in the pools of each blockchain node before they are added to the ledger. Therefore, the time between the creation of a transaction and its inclusion in the register is an excellent opportunity for a hacker to launch a preemptive attack.
Attackers are looking for transactions that can be compromised using the Miner Extractable Value. After discovering one, they create their transaction with a higher transaction fee. The transaction for which the commission was paid above will be processed first. Thus, the attacker can make a profit since his transaction will be the first.
3) Compromised Private Keys
Another possible target for hackers when it comes to DeFi security threats is to leak private keys. These keys are secret pin codes that are needed to gain privileged access to transactions.
Blockchain protocols use cryptographic encryption to control all blockchain accounts. Therefore, many of the DeFi risks arise from the potential for private keys to be compromised.
There are many ways to theft private keys, and all of them appeared before DeFi was created. For example, attackers using malware can gain access to private keys. In this case, using a compromised MetaMask interface, scammers can obtain Ethereum community data. MetaMask is a popular application used to interact with and execute transactions on the Ethereum blockchain. Unfortunately, due to malicious versions of this application, many users have lost their cryptocurrency.
DeFi security risks due to the theft of private keys can also arise from weak key generation. You need to use a reliable random number generator when generating one, since using a bad generator can easily be hacked. In addition, poorly developed keys are easier to guess so that a hacker can access a user’s account on the blockchain.
And another way to lose the private key is to leak the original phrase. Some users use mnemonic sayings to help them remember the private key faster and easier. Cracking the key will only take time if the fraudster can find out the seed phrase.
4) Inefficient Access Control
Many DeFi smart contracts use privileged functions, another vulnerability and an excellent opportunity for attackers. Privileged positions are created so that the smart contract owner can call these functions. The most common access control method is to specify function calls. They must be executed at one or more addresses from the whole set.
Access controls can be implemented incorrectly, allowing a hacker to gain privileged access to a smart contract and receive money.
5) 51% Attacks
The 51% attack is one of the most common security threats, meaning this vulnerability is common to all blockchains. However, among the various decentralized finance security risks, this one is the most unlikely, which is good news. This vulnerability occurs primarily due to the development of consensus algorithms in Proof-of-Work protocols.
In the event of this attack, attackers could try to gain control over more than half of the blockchain’s computing power. This would allow them to have faster growth of their blockchain technology compared to others. In addition, it would make it possible to hack and rewrite the contents of the distributed ledger. This vulnerability could also open up other types of attacks – double-spend attacks. Thus, 51% of attacks can threaten the security of DeFi protocols running on smart contracts.
How to prevent DeFi hacks?
Investors and the projects themselves are responsible for the security of DeFi. The most effective way to eliminate vulnerabilities is due diligence. And to reduce the security risks, projects should undergo regular security testing. Conducting audits of all smart contracts is also an essential part of these checks. Also, many enterprises are releasing new updates and patches for DeFi solutions to fix a vulnerability in the system before scammers take advantage of it. And the faster the DeFi project updates security systems, the higher the chance of preventing the project from being hacked.
Now, attackers are actively trying to create fake sites or channels of DeFi projects in order to lure users into transferring all the funds to hackers’ wallets. Therefore, DeFi projects must partner with businesses that supply security products to prevent such hacks. After all, most hacks are caused by the mistakes of project DeFi developers. Therefore, when looking for programmers for their DeFi solutions, projects should look at the candidate’s work experience and portfolio.
By following all of the above recommendations, projects greatly increase their chances of preventing major information leaks and DeFi hacks.
DeFi security audit
As mentioned earlier, conducting smart contract audits by reputable vendors is the most effective measure to protect DeFi projects from hacking. During the audit, specially trained specialists perform a check for vulnerabilities in smart contracts and provide clients with a detailed report. This report outlines steps you can take to improve security and address vulnerabilities.
Two independent auditors must carry out the audit. The auditor’s role is to provide an adequate and correct assessment of the severity of each problem identified. This is necessary so that the client can understand which errors need to be fixed and which ones are of higher priority.
As such, only those projects that put in enough effort to keep DeFi secure prevent significant hacks.
DeFi is a relatively secure platform because the way it works implies it. However, due to the fact that there is a lot of money in this environment, scammers are constantly finding new loopholes. In fairness, it should be said that developers are continually trying to improve protection measures.
In early 2021, DeFi token sales were huge. However, in 2020 many DeFI tokens had a lower-performing performance compared to Ethereum Solana and other Layer 1 blockchains. Nevertheless, DeFi token purchases are likely the perfect investment option for several reasons.
DeFi Stakes have a risky nature due to their hold periods & volatility. Even when you earn decent interest on staking, the cost could fall instantly, resulting in your losing money. Depending on the amount you are trading, it could be several days before you can sell the cryptocurrency immediately.
Popular attacks include Steal private keys, Liquidity pool estimates, Smart contract logic, Flash loan, Ponzi schemes and rug pulls, Front running attacks, etc.