Decentralized Finance Platforms Face Security Challenges As Adoption Grows
The growth in the decentralised finance (DeFi) is booming, with more adoption occurring than before; however, both the security concerns and the technical difficulties are increasing simultaneously. More and more users moving into the DeFi space in hopes of earning high yields and traditional means of finance are struggling to come up with a series of high profile hacks and vulnerabilities that are threatening to tarnish the nascent sector’s reputation.
The TVL in DeFi protocols has recently surpassed the $150 billion mark, having passed a notable threshold since popular analytics platform DeFi Llama offers the data. The rapid growth and increased mainstream interest in decentralised financial services are largely reflected in this increase, which is a very substantial increase from just a year ago. But this growth has also been tapped by malicious actors and so have seen a rash of security incidents that have cost the users Millions of Dollars.
The most recent and one of the notable security breaches were on a popular cross chain bridge, and thieves stole over $100 million worth of cryptocurrencies. This is yet another reminder of why cross chain security is such an important issue, as many experts doubt the feasibility of existing bridging solutions. The DeFi ecosystem has relied heavily on cross chain bridges that facilitate transferring of assets across different blockchain networks, however, they have proved to be weak link in terms of security.
These attacks have caused concerns about the frequency and scale of such attacks throughout DeFi protocols and dangers to users. The fast rate of development in DeFi space has resulted in many industry insiders believing that thorough security audit and reliable risk management was sometimes given short shrift. Accordingly, DeFi projects have a growing interest to have more rigorous testing procedures before releasing new products or features, as a security priority.
In reaction to these problems, there have been initiatives to create the security of DeFi protocols. The trend of the recent years is the rise of bug bounty programmes where organisations pay an ethical hacker for identifying and reporting vulnerabilities. Also, DeFi projects have started to call on the help of specialised blockchain security firms, due to the increased demand for their services, to enhance their protection against an attack.
The decentralised insurance protocols have also been explored in the DeFi community to secure the protocols from hacks. Much like other platforms, these ones seek to take on the role of covering users against possible losses incurred from the failure or hack of a smart contract, offering another layer of protection to DeFi participants. While the efficacy and persistence of these insurance models are as of yet unknown, these insurance models present their own set of challenges around accurately assessing and pricing risk in the fast paced DeFi environment.
While these security concerns may hamper some investors and users in participating in DeFi, the lure of DeFi is too strong for many. High yields, permissionless access to financial services, and financial innovation remains a compelling promise of adoption. In response to market volatility and security incidents, major DeFi protocols like Aave, Uniswap and Compound have seen steadily increasing numbers of users and transactions.
Traditional financial institutions and regulators also pay attention increasing interest in DeFi. Several important banks have made public their plans of exploring DeFi technologies, noting the chances for these platforms to sideline the classic financial services. Nevertheless, this growing mainstream interest has also attracted government regulators’ scrutiny over the risk this growing mainstream interest had to investors and also to the broader financial system.
The DeFi sector is a source of concern for many regulatory bodies everywhere, which are trying to find ways for effective regulation while keeping innovation in cheque. The decentralised nature of so many DeFi protocols makes them difficult for regulators accustomed to dealing with centralised entities. For some time, DeFi has begun to be explored by some jurisdictions through the investigation of regulatory frameworks of their own specifically designed for DeFi, while other jurisdictions are trying to apply financial regulation to the whole case.
In the space of DeFi, the tension between innovation and security is a tricky one that is only going to increase as the industry moves forward. Many DeFi experts agree that the long term success of the sector will come from overcoming these security concerns by staying open and permissionless while still being appealing to users. This may mean relying on a portfolio of technological solutions, better governance models and cooperative efforts between projects on the one hand, and between projects and security experts or regulators on the other.
DeFi sector will go through these challenges and the coming months and years can be crucial to the sector’s future. How the industry responds to both security vulnerabilities and presents a more proactive approach to risk management and regulators will have a defining role in its fate as an industry. DeFi has been rapidly experimenting with the boundaries of what’s possible in finance and the learning from current security challenges may ultimately create a more resilient and secure ecosystem able to achieve the promise of truly decentralised and accessible financials for all.