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It is quite evident that the decentralized finance market is among the fastest-growing segments of the cryptocurrency, with over $82 billion worth of value locked up in different smart contracts, a significant increase from $55 billion a year ago.
Although various aspects of DeFi match with traditional finance, one huge difference is that instead of depending on any intermediary such as banks, it relies on smart contracts. Smart contracts are programs stored on the blockchain. They automatically enforce contractual agreements between parties as and when agreements are met.
Defi runs wholly by smart contracts, be it lending protocols or decentralized cryptocurrency exchange. There is no doubt that they are very important but they can not be trusted completely. In fact, most smart contracts have bugs and vulnerabilities that attackers use in their favor in order to drain the wallets of users.
The bad news is that smart contract bugs are among the many risks in the Defi world. Let’s look at some of them and the ways in which they can be combated.
Smart Contract Risks
Since smart contracts are open-source, they are also open for technically-savvy attackers to access the code and make changes in it, eventually stealing funds from other users.
And, it has happened many times. According to CertiK, a blockchain security firm revealed that $1.3 billion worth of funds was stolen by exploiting vulnerabilities in smart contract code.
However, many companies are working toward providing security to companies. For example, Nym Technologies has come up with its mixnet that will hide all blockchain transaction metadata, making it impossible for messages to be tracked or traced even with the use of advanced analytics software.
Phishing Attacks
Phishing means attempts by hackers to steal the login credentials of crypto and DeFi wallets of users through various clever tactics. The most common is to send an email or a message that contains a link that leads the user to a legitimate DeFi website or portal.
The users will be asked to enter their login credentials which will take them to a fake site, eventually emptying their wallets.
DeFi users can hide their wealth and portfolio activity from these bad actors using the Manta Pay service, which is a confirmed way to avoid phishing attacks.
The complexity of DeFi Protocols
Another major risk that is least talked about is the incredible complexity of some of the services on offer. The users require knowledge of not only the protocols but also concepts such as liquidity provision, yield farming, staking, and more.
New traders can opt for a service such as HyperDEX in order to combat the complexity of DeFi.
DeFi Rug Pulls
Another common scam in DeFi is Rug Pulls, where bad actors create a new crypto token and a liquidity pool to allow the token to be traded. The new token will be paired with a base token such as a stablecoin like USD Coin, or ETH, in the liquidity pool for completing the trades between the two on a decentralized exchange.
Again, spotting rug pulls in DeFi is of course not easy. A way a project is a scam can be found out is if just a few wallets control around half of the circulating supply. Blockchain explorer service such as Etherscan for ERC20 makes it possible to check token distribution
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Andrew is a blockchain developer who developed his interest in cryptocurrencies while pursuing his post-graduation major in blockchain development. He is a keen observer of details and shares his passion for writing, along with coding. His backend knowledge about blockchain helps him give a unique perspective to his writing skills, and a reliable craft at explaining the concepts such as blockchain programming, languages and token minting. He also frequently shares technical details and performance indicators of ICOs and IDOs.
