Nowadays, the blockchain market as a whole is in its infancy, and the decentralized finance (DeFi) market is its most promising part.
According to DefiLlama data, in 2021, the DeFi market had around $200 billion of liquidity locked in smart contracts. If we view this capital as an initial investment, this market looks like a highly promising venture. Not too many global companies can boast of such a capitalization. But any young market has its teething problems. With DeFi, the main issue is a lack of qualified blockchain developers.
This industry is very young and has a relatively small user base. Most people have at best heard about DeFi without having any idea about what it is. But as it happens with every new promising venture, it quickly creates a lot of speculative interest. Unfortunately, preparing personnel takes much longer, especially when it comes to such knowledge-intense spheres as blockchain and smart contract development. This means that some project teams will have to compromise and hire less experienced personnel.
This problem inevitably creates a growing risk of security loopholes in the code of these projects. And then we have to deal with its consequences in lost user capital. For just a brief understanding of how big this problem is, I can say that about 10% of DeFi’s total liquidity locked has been stolen by hackers. It should not surprise anyone that the mainstream public would prefer to stay away from a financial system that poses such dangers to their funds.
How have DeFi exploits changed recently?
Attacks on DeFi have long been centered around reentrancy attacks. We can recall the famous The DAO hack of 2016 that resulted in the loss of $150 million in investor capital and led to Ethereum’s hard fork. Since then, this vulnerability has been exploited many times in different smart contracts.
How to defend against DeFi exploits?
To build a secure DeFi protocol, ideally, you should only trust experienced blockchain developers. They should have a professional team lead with skill in building decentralized applications. It is also wise to remember to use safe code libraries for development. Sometimes, the less up-to-date libraries can be the safest option than the ones with the newest code bases.
Testing is another crucial thing all serious DeFi projects must do. As a CEO of a smart contract audit company, I always try to cover 100% of our clients’ code and stress the importance of decentralized protection of the private keys used to call functions of smart contracts with restricted access. It is best to use decentralization of the public key through a multisignature that prevents one entity from having full control over the contract.