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Decentralised Finance (DeFi) has revolutionized the traditional financial services ecosystem by utilizing blockchain technology to remove intermediaries. The result? Faster, more efficient, and cheaper financial services. However, despite its numerous advantages, the security of DeFi protocols has become a significant concern in recent times.
Reportedly, back in 2020, hackers had stolen around $100 million from DeFi projects. The staggering financial losses incurred due to the DeFi hacks highlighted the need to identify the causes of such exploits and develop preventive measures.
So, what are the most popular DeFi hacks you should know about, and what can you learn from them?
Let’s find out in this post.
Bitcoin’s launch marked the initiation of DeFi, and it has since expanded to include DApps (decentralized applications) that offer all sorts of traditional financial services with the added factor of decentralization. As of March 2023, the reported total value of the locked assets in DeFi protocols is $47.97 billion (TVL).
Combined with the fear, uncertainty, and doubt (FUD) brought on by the 2022 bear run for crypto and the collapse of big-name crypto like the exchange FTX, the news of big DeFi hacks from the past few years does discourage a lot of users from shifting over to decentralized finance, despite the popularity of DeFi. DeFi hacks usually target commonly used decentralized finance protocols, resulting in significant financial losses.
These losses not only affect individual users but also create a general loss of trust in the viability of DeFi as an alternative to traditional financial services.
DeFi protocols are vulnerable to various attacks and hacking attempts due to their open-source nature, composability, and fast-paced development cycle of DeFi projects.
Hackers exploit DeFi protocols through various methods. One of the most popular DeFi hacks is a smart contract exploit, which involves exploiting flaws in the code of the smart contract used by the DeFi protocol. This method allows hackers to manipulate the DeFi protocol’s behavior and steal users’ assets.
In a rug pull, the hacker creates a fake DeFi project and convinces users to invest their funds. Once enough funds have been collected, the hacker withdraws all the assets and disappears, leaving users with worthless tokens.
Another well-known method of DeFi hacks is through flash loans, which allow hackers to borrow large amounts of cryptocurrency without any collateral. The hacker can then manipulate the DeFi protocol and drain liquidity pools or siphon off funds from other users.
Here’s some detailed information on ways hackers exploit DeFi protocols:
Oracle price manipulation is a common DeFi hack where attackers manipulate an oracle smart contract, leading to system failure, theft, and damages. Oracles provide real-world data to blockchains, with price feeds being the most exploited data. Oracles can gather price information from centralized exchanges via APIs or decentralized exchanges prone to manipulation.
The fast-paced launch of DeFi projects can lead to seemingly trivial errors being missed by developers, making them susceptible to exploitation by DeFi hackers. The open-source nature of DeFi protocols allows attackers to view the smart contract code and identify glitches for exploitation.
A reentrancy attack is a DeFi hack that can drain a smart contract’s funds by repeatedly calling the withdraw function after an untrusted contract makes a recursive call back to the original function.
Now that we know the many ways DeFi hacks may happen, let’s examine some of the top DeFi hacks that have shaken the industry and discuss the lessons learned from these incidents.
One of the most popular DeFi hacks, the Ronin Network hack, resulted in a significant over $625 million loss in ETH and USDC assets. Ronin is a sidechain for the play-to-earn game Axie Infinity that allows players to seamlessly transfer ETH to the Axie Infinity network.
Attackers could compromise the Ronin Bridge and forge fake withdrawals, gaining unauthorized access to five validators and withdrawing around 25.5 million USDC and 173,600 ETH.
Nomad Bridge suffered a significant DeFi hack in which attackers stole nearly $190 million in tokens. The DeFi hack involved 1175 transactions and was one of the first instances where multiple hackers copied the same exploit.
The DeFi hack was attributed to a vulnerability in the code of Nomad, which allowed the hackers to withdraw more assets than deposited. While the Nomad team requested the return of funds, some white hat hackers returned around $30 million. This hack is one of the most significant examples of DeFi hacks.
Wintermute was hit by a DeFi hack, resulting in a loss of $160 million. The protocol’s use of vanity wallet addresses, which were vulnerable to address recreation, was identified as the main cause of the hack.
The hackers could gain access to Wintermute’s DeFi vault and hot wallet contract, moving the funds as they pleased.
Wintermute attempted to stop the hack by removing all ETH from its hot wallet, but the admin address for its vault had not been removed. The hack details are still unclear, but it is evident that hackers stole everything they found in the hot wallet.
The Wormhole Bridge attack is a significant DeFi hack in which hackers stole around $325 million by exploiting the protocol’s liquidity mechanism.
The Wormhole Bridge is a token bridge that enables users to exchange tokens across various blockchains. Hackers took advantage of the liquidity mechanism and minted 120,000 wrapped ETH tokens on Solana without any backing.
The hacker then siphoned around 93,750 tokens into the Ethereum network, redeemed them for actual ETH, and purchased different tokens.
The Wormhole Bridge attack highlighted the challenges still faced by crypto bridges, and the need for better security protocols.
The Beanstalk protocol, a decentralized stablecoin platform based on algorithms, suffered one of the most significant losses from a DeFi hack, with almost $182 million at stake. The hack revealed how a simple security vulnerability in DeFi tokens could result in devastating losses.
In this case, using flash loans allowed the hacker to gain control over the governance mechanism and withdraw funds from the protocol.
This DeFi hack highlights the importance of strong security measures, particularly in decentralized governance protocols, to prevent such attacks in the future.
The Elrond hack is another of the major DeFi hacks, resulting in a loss of nearly $113 million. The hackers exploited a vulnerability in Maiar, a decentralized exchange, to steal 1.65 million EGLD tokens, the native token of the Elrond blockchain. They employed a smart contract and three wallets to siphon off the tokens from the decentralized exchange.
Additionally, the hackers rapidly sold almost 800,000 EGLD tokens, worth $54 million, on Maiar. The hackers also sold the remaining tokens on centralized exchanges and exchanged some for ETH.
The Scream hack is a notable DeFi hack that affected the lending platform based on the Fantom blockchain. The platform suffered losses of nearly $38 million due to a decline in the peg of stablecoins such as DEO and Fantom USD.
The hack was executed through a simple yet ambiguous loophole in the Scream protocol, which hardcoded the value of stablecoins without any adjusting mechanisms.
As a result, whales exploited the loophole to withdraw valuable stablecoins while depositing the declining assets. The Scream protocol introduced Chainlink oracles to obtain access to real-time pricing data as a replacement for hardcoded stablecoin pricing.
The Qubit Finance DeFi protocol suffered a major hack, losing almost $80 million. The hacker exploited a vulnerability in the QBridge contract, minting around 77,162 qXETH by tricking the platform into believing they made a deposit multiple times.
The hacker then exchanged the assets on the protocol for BNB tokens and disappeared with the loot. The Qubit Finance DeFi hack highlights the importance of robust security measures and constant monitoring of smart contracts to prevent such attacks.
The Horizon Bridge DeFi hack in June 2022 resulted in significant losses of around $100 million, adding to the list of crypto bridge attacks last year.
The platform offers cross-chain interoperability between various blockchain networks, including Ethereum, Harmony, and Binance Smart Chain.
The exploit occurred on the Harmony-managed platform, where hackers moved out $98 million worth of tokens and exchanged them for ETH, affecting more than 50,000 wallets. They also used Tornado Cash to move out an additional $35 million.
This DeFi hack highlights the security risks associated with cross-chain platforms and the need for robust security measures to prevent such incidents.
Cashio, a stablecoin protocol, was also a victim of a DeFi hack in the past year, resulting in the decline of the CASH stablecoin of the protocol with losses of almost $48 million. The protocol enables minting CASH stablecoin through deposits backed by interest-bearing liquidity provider tokens.
The hacker exploited the basic functionality of Cashio to mint billions of CASH and exchanged them for UST and USDC before withdrawing the tokens using the Saber DEX. As a result of this hack, the CASH stablecoin crashed to $0.
All these popular DeFi hacks we just mentioned have brought to light the vulnerability of these protocols, and the urgent need for measures to prevent future hacks. To ensure the ]security of DeFi, developers and the DeFi community need to adopt the best practices that prioritize security.
Likewise, DeFi protocols can also integrate practical solutions such as multi-factor authentication, KYC/AML checks, and other security features to reduce the risk of DeFi hacks.
DeFi has revolutionized how we interact with financial services, offering decentralized and trustless solutions that provide greater accessibility and transparency. However, with the growing popularity of DeFi, there has also been a rise in DeFi hacks, resulting in significant losses for many protocols and their users.
To prevent DeFi hacks, the developers and communities must implement best security practices, including smart contract security audits, penetration tests, and bug bounties. Collaboration with external security experts can definitely enhance the safety of DeFi protocols.
Moreover, protocols should focus on quick detection and response to suspicious activities to minimize the impact of any possible hacks. By implementing these measures, DeFi protocols can continue to grow and offer revolutionary financial services securely and transparently.
The Ronin Network hack is by far one of the biggest DeFi hacks on record, revealing quite a few vulnerabilities in DeFi network security. The hacker stole a whopping 173,600 ETH and 25.5 million USDC from Ronin Bridge in just two transactions.
DeFi is a relatively new movement, and apps that implement principles of decentralized finance are often fairly new ones that have a long way to go yet in terms of development. Therefore, yes, there is risk in DeFi as it involves new and complex technologies that are not yet fully understood.
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