The last few months have been extremely dynamic for DeFi companies. In mid-May this year, the industry reported a record market size, today it is struggling with gigantic declines. More and more controversy is also growing around hacker attacks and cyber crimes. People are starting to approach DeFi applications with increasing skepticism. There is also the question of their participation in the enforcement of cryptocurrency regulations and their involvement in formalizing this market. What do DeFi companies do, what do they owe their popularity to and are they able to rebuild their reputation damaged by hacking attacks?
Decentralized finance commonly referred to as DeFi, is an open and global financial system under the concept of which we can consider financial applications dealing with cryptocurrencies and blockchain technology aimed at bypassing the activities of financial intermediaries. The DeFi industry was strongly inspired by blockchain technology. Blockchain allows various entities to store copies of transaction history, which means that they are not controlled by a central institution. Centralized systems limit in some way the speed of transactions or their complexity. DeFi found its niche here and expanded the use of blockchain technology, enabling ordinary asset transfers and more complex operations. It gained popularity by speeding up the processes of various transactions, but also by getting rid of financial intermediaries. In practice, this means that between the payer and the institution, there is no one else to regulate the possible flow of money. On one hand, it significantly speeds up transactions, on the other hand, it opens the door to the institution’s lack of control over transactions and anonymity that fosters cybercrimes.
The most popular branches of the DeFi activity include: decentralized exchanges, stablecoins (cryptocurrencies that are not prone to exchange rate fluctuations or their susceptibility is minimal), forecast markets and loan platforms. In addition, the applications also enable activities such as yield farming (they allow you to scan DeFi tokens in search of greater profits), liquidity mining (they give users free tokens to encourage them to be more active) or composability (they make application codes available for public review and on their basis you can compose more; codes are the building blocks).
New technologies have always been present in the world of finance and have influenced the development of its ecosystem. Even though DeFi applications are currently connected to cryptocurrencies and blockchain technology, they have the potential to expand their business. What attracts users to decentralized systems? Providing financial services from anywhere in the world, regardless of origin or age, seems to be an extremely attractive option. The absence of middlemen also ensures greater user control over their assets thanks to e-wallets. In addition, complete anonymity is also tempting – it is not known who is sending the money, you do not need to verify your identity to use the services. Applications of decentralized finance are still at the beginning of their path, therefore, despite the impressive number of transactions and contracts, they are the main target of hackers and cybercriminals.
An open and decentralized structure also causes many problems related to financial regulations. The contract algorithm is made between two parties, but there are many ways in which the software may malfunction. In such situations, relying on the idea that ‘code is law’ creates many ambiguities and a room for abuse. What seems to be of key importance in regulating DeFi is, above all, operating at high risk. Investments related to cryptocurrencies, especially those related to DeFi, can be extremely risky, you have to take into account the losses and great unknowns related to the behavior of other users.
Recently, enthusiasts of cryptocurrencies and decentralized systems have been losing their sleep over the hacking attack on the PolyNetwork platform. It allows users to transfer or exchange tokens between different blockchains. The company announced the attack in a statement and asked the hacker to return stolen assets. The situation has been resolved since – after weeks of surprising twists and negotiations between the parties, the attacker has returned the stolen assets. The hacker claims that he made the attack for fun and to test his abilities, as well as to expose the lack of proper security. This resulted in PolyNetwork offering the person behind the attack the position of their Chief Security Officer, to show appreciation for their knowledge and skills regarding the security systems.
The reaction of the cryptocurrency market to the initial attack was just as surprising. The CEO of the Binance exchange, offered his help on Twitter, but pointed out that the lack of regulation may effectively prevent it. Binance wants to be treated as a normal financial institution, it is trying to regulate its activities itself, the increase in such attacks on crypto-related institutions only justifies it.
In the last eight months, hacker attacks on DeFi platforms accounted for 75% of all attacks related to the crypto industry. In its report, CipherTrace points out that, compared to 2020, hacker attacks on DeFi platforms increased threefold in 2021. What makes the decentralized finance industry so vulnerable to hacking attacks?
Is there a recipe for a DeFi application that could help minimize the number of attacks and ensure greater customer security? Identity verification could provide a solution to the problems. However, the main principle of operation of such applications would have to be disrupted. Anonymity could not exist in this system as it is not conducive to control and allows cybercriminals to cheat. Remote identity verification could enable users to go through the process quickly without leaving home. At the same time, it would regulate the rules of operation to some extent and would improve transparency. Along with this, cybersecurity would increase and hacker attacks would be minimized. Although the whole idea behind DeFi’s operation is based on decentralized anonymous operations, this model will not stay as it is for long. Using identity verification can increase the user’s security. Fully-Verified offers video verification services supported by latest technology and artificial intelligence. The verification can be performed at any time and at any place in the world. Additionally, the process is led or supervised by a trained operator, which ensures the highest level of security and accuracy.
Observing the development path of DeFi platforms is a fascinating process – from gigantic increases through spectacular declines. The DeFi industry is an extremely tempting prospect and a promising financial sector. However, due to the potential dangers, it is possible that institutions will only partially use DeFi in the future. It is still a young industry and there is much speculation about its development. The near future will show which predictions will turn out to be true.