Why are there so many hacks in DeFi: Causes and lessons to be learned

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The trust of users around the world in the security of cryptocurrency platforms is declining due to the large number of hacks. Even if your DeFi protocol hasn't been hacked in 2022, that doesn't mean it won't happen next year. Even protocols considered the most reliable have been hacked. Lately, it is neither more nor less than one of the most robust protocols, namely the Curve protocol which has just experienced an extraordinary hack.

Cybersecurity requirements evolve with the industry, and it's becoming increasingly difficult to protect your fund with outdated solutions. Hackers always manage to discover security breaches. This is why continuous updates and security improvements are a must for any blockchain-related project. And no one knows this better than an investor who owns cryptocurrencies.

In this article, we will see why centralized finance regularly experiences hacks and we will discuss why the Bitcoin network is spared from hacks, at least until now.

How many hacks are there in the crypto industry?

Sincerely?

The number of hacks is alarming.

Piracy has always been a huge problem for the industry, since its inception. This has always been the very sore point of the entire industry. Since the emergence of smart contracts and the rapid evolution of DeFi, we have seen more and more hacker attacks.

During 2018-2019, hackers mainly attacked centralized exchanges, but since 2020, DeFi protocols have become the main target.

It was therefore predictable that 2021 would become a big year for cryptocurrency thefts, with around $3,2 billion stolen over the last year, an increase of 516% compared to 2020. DeFi hacks were responsible for 72% of the 2021 total, or $2,3 billion stolen from DeFi protocols.

If you think that the year 2022 was violent in terms of hacks, the year 2023 is not exempt as the user base has significantly declined. In fact, since 2022, the bear market is one of the most dramatic the industry has ever seen.

In 2023, there were no less than 18 hacks that occurred on different blockchains. Recently, on July 30, 2023, the BeinCrypto newspaper reported that “Curve Finance was victim of an attack that resulted in losses estimated at $41 million for users of the platform.

This was all the more surprising since the Curve protocol is one of the oldest and most popular in decentralized finance.

The top 5 causes and motivations for DeFi hacks

It is evident that the rise in DeFi hacks in recent years can be linked to certain factors that motivate hackers and explain the attacks.

Let's review the five most common factors in these two categories.

1. High liquidity of protocols DeFi: DeFi protocols are becoming increasingly adopted by many in the cryptocurrency industry, meaning there is liquidity and therefore more money to steal.
2. Interconnection : Many DeFi protocols depend on each other, and a successful hack in one protocol can have a domino effect on the entire DeFi ecosystem. This is certainly the most negative point of hacks on DeFi. They have implications for other protocols and other tokens, which may disrupt all or a large part of the market.
3. Open-source code : Most DeFi platforms have a code open-source, which allows for analysis and reuse, but it also makes many projects vulnerable to “ rugs sweaters " and other hacks. Hackers have access to the project's source code and can look for holes and other things they can compromise.
4. Increasing complexity of the ecosystem: Smart contracts are already complex on their own, but with the additional features and integrations that allow them to interact with other blockchain-based projects, security becomes even more difficult to achieve.
5. Insufficient security audits : Most DeFi projects neglect security audits to detect vulnerabilities and other security issues before they are exploited, which exposes them to risks and leads to security breaches.
6. Human error : Even in the 21st century, where it seems like you can automate everything, human error plays a vital role in DeFi's biggest hacks and hacks.

Why are hackers needed in DeFi?

Hackers are generally individuals who exploit vulnerabilities in computer systems to illegally access information or assets, and this is illegal in most jurisdictions. Hacking activities are undesirable and can lead to significant financial losses for DeFi users and projects.

However, some arguments can be made to explain why hackers may play a role in the evolution of DeFi. They make it possible to identify vulnerabilities in code. When a hacker discovers and exploits a security vulnerability in a DeFi protocol, it can prompt developers and project teams to strengthen their security and patch these vulnerabilities. This can lead to continued improvements in protocol design and implementation.

Additionally, hackers can educate users, developers, and projects about the importance of security and thorough protocol auditing.

Why has Bitcoin never been hacked?

It should be noted that the Bitcoin network itself has never been hacked. However, this does not mean that Bitcoin users have never been hacked or that Bitcoin-related services have never been compromised.

Here are some reasons why the Bitcoin network itself has not been hacked.

1. Protocol security: Bitcoin's underlying protocol, based on proof-of-work (PoW), is designed with robust security. PoW ensures network security by making it difficult and expensive for an attacker to take control of the majority of the network's computing power, making 51% attacks very expensive.
2. Immutability: The Bitcoin blockchain is famous for its immutability, meaning that confirmed transactions cannot be changed or reversed. This enhances transaction security and prevents transaction retroactivity.
3. No connection with other blockchains: The Bitcoin network is not linked to other blockchains and protocols built on layers 2 of blockchain like Stacks or Liquid do not directly affect the network. This prevents hack contagion.
4. Community Size: Bitcoin has a large community of developers, miners, users, and security advocates. This diversity and community size helps identify and resolve potential security issues quickly. The Bitcoin ecosystem is certainly the most resilient there is.

However, although the Bitcoin network is secure, it does not guarantee absolute protection for individual users or third-party Bitcoin-related services. Hacks have been reported in Bitcoin exchanges, online wallets, third-party services and poorly designed applications. These hacks may be due to vulnerabilities in third-party systems or human errors but not to the Bitcoin network itself.

How to protect yourself from attacks on DeFi?

To improve blockchain security and strengthen cross-chain environments, both cryptocurrency newcomers and veterans must strictly follow best practices to mitigate risks.

Here are some tips for protecting your assets in the world of decentralized finance:

👉 Carry out a careful check:

It is essential to do thorough research to find information about the blockchain development team and their track record.

If previous DeFi projects have experienced security incidents, there are likely issues with their internal release processes. It is important to dive into the world of cryptocurrency and research each person involved in the project, as well as any related factors that could impact the final outcome.

Remember to clean out your portfolio regularly and divest from poorly performing or risky protocols.

👉Use a dedicated wallet for protocols

The ideal way to use DeFi protocols is to have several wallets dedicated to each operation or each blockchain. This allows you to limit additional losses in the event of a hack.

👉 Choose a protocol verified by so-called “ethical” hackers:

Make sure the platform works with an established ethical hacker service to identify and fix potential vulnerabilities between blockchains.

If the team fails to properly manage internal risks and potential vulnerabilities, there is a high likelihood that malicious users will focus on this platform. You can find this information by following protocol announcements and following established ethical hacking service providers.

👉 Keep an eye on the Total Value Locked (TVL):

Look at how many cryptocurrencies have been locked (or the total value of cryptocurrency assets deposited and blocked) in the protocol. If the T reaches billions of dollars and the protocol has been active for a long time, the security risks are likely relatively low. But as always, you have to be particularly careful.

Don't put your eggs in one basket, as the saying goes.

👉 Stay tuned for the latest news:

The world of cryptocurrency is known for evolving rapidly. It is therefore essential to stay on top of the latest developments, including events related to blockchain security. It is important to follow the development of the project and see the outcomes. In many cases, protocols serve no other purpose than to enrich the founders. They can invent narratives but don't be naive, they are there to extract money from you. Nothing more.

👉 Watch the founders

Track what the founders are doing and if they are still actively contributing to the project. If they have withdrawn, you need to reformulate your strategy based on your findings.

Final word on DeFi hacks

Blockchain security is improving every day, and DeFi still needs to improve. The blockchain itself is very secure, but vulnerabilities can appear in operations between multiple blockchains. While cross-chain bridges certainly create many security challenges, they are essential for interoperability, scalability, and improving user experience.

As the DeFi space evolves and grows, the ecosystem as a whole improves with each security incident. We can learn from each protocol hack and evolve the environment to ensure security and privacy.

Although security events have occurred in the past and will certainly occur in the future, most DeFi projects can avoid headlines by taking a proactive approach to the security of their protocols.

In the meantime, remaining vigilant is the most recommended attitude.

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Note: No financial advice is given in this or any other article on zonebitcoin. This is information of which you are the sole judge and master. Be responsible for your investments.

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