Hackers Have Stolen Over $2B In 2022 By Exploiting Security Risks In DeFi & Web3
Decentralized Finance (DeFi) is the fastest growing space within the crypto industry. The total value locked (TVL) in DeFi protocols reached $239 billion in 2022, a 40,000% rise from 2020. Transactions in DeFi continue to rise with every passing day. DeFi aims to eliminate the inefficiencies in traditional finance. As traditional financial institutions embrace decentralization, the DeFi industry is only going to grow further. But, the recent hacks have exposed several security risks in DeFi.
While DeFi protocols have the potential to outperform traditional financial systems with increased security and faster processing, security remains an area of concern. The massive cyber attacks on DeFi protocols have left stakeholders shocked while leaving wallets bereft of millions of dollars.
Hackers Exploiting Vulnerabilities To Drain DeFi Wallets
Hack of DeFi wallets is no more a one-off incident. The frequency of hackers breaching DeFi wallets continues to increase with every passing day. Hacking incidents left DeFi and Web3 bereft of over $2 billion in just the first 6 months of 2022. Hackers breached Axie Infinity’s Ronin bridge, exploited a vulnerability in the Wormhole network’s code, and hijacked Beanstalk Farms in just the first 4 months of 2022. From rug pulls to frontrunning attacks, there are several security risks in DeFi that companies need to take care of. As incidents of DeFi hacks continue to rise, the FBI has asked DeFi platforms to beef up their security.
Amid the rising incidents of hacks and breaches, DeFi platforms must warn investors against the vulnerabilities.
What Are The Biggest Security Risks In DeFi?
- Rug pulls: Rug pulls are one of the most common and worst examples of insider attacks in DeFi. Rug pull is one of the most common scams where scammers create new tokens and create a liquidity pool by connecting these tokens to a base token or a stablecoin. Once investors start contributing to the liquidity and it reaches a certain threshold, the creators cash out their position and exit. Thousands of investors have lost millions of dollars due to rug pulls, and it continues to be one of the biggest security risks in DeFi.
- 51% Attacks: 51% Attacks are one of the most common types of attacks in crypto. 51% Attacks target blockchain consensus algorithms. That is why proof-of-work protocols are the biggest victims of 51% Attacks. In 51% Attacks, attackers take control over a major share of the computational power of blockchain. In the case of DeFi protocols, attackers rewrite/manipulate the contents of the distributed ledger through 51% Attacks. Such attacks can easily undermine the security of DeFi platforms running on smart contracts.
- Honeypots: Honeypots are all about price manipulation to lure retail investors. A Honeypot is when scammers push the price of a token substantially through manipulation, with no sellers in sight. If you come across a token with similar price action, it is a red flag 9 out of 10 times. In the case of a Honeypot, scammers control the only wallet with permission to sell the tokens. As an investor, a honeypot is one of the security risks in DeFi that you must be aware of.
- Lost Private Keys: ‘Not Your Keys, Not Your Crypto’ is the mantra you must stick to, irrespective of the sector you are investing in. If a hacker manages to get access to your private key, he/she can easily steal your tokens in seconds. Compromised private keys have emerged as a major headache for DeFi protocols despite the extremely secure nature of crypto. A lot of investors use decentralized wallets like Metamask for trading DeFi tokens. However, several malicious versions of Metamask have been floated by scammers to get access to the private keys of users. As an investor, you must ensure the authenticity of the wallets and exchanges you use.
- Exploits: Hackers are always on the lookout for vulnerabilities in exchanges, browsers, or wallets that they can exploit to steal crypto. For example, the exploit on the cross-chain token bridge Nomad that involving a steal of around $200 million. As of now, there have been more than 104 DeFi exploits, amounting to over $3.6 billion in lost funds. Thus, exchanges and browsers must evaluate their security regularly to avoid such incidents.
Bottom Line
DeFi is certainly the future of global finance. It aims to revolutionize global finance through smart contracts. The aim is to promote financial independence through decentralization. But the security risks in DeFi are the biggest barriers to its mainstream adoption. Therefore, DeFi platforms, exchanges, and crypto companies must take the necessary steps to mitigate these risks and beef up security.