Decentralized horror: why the DeFi sector scared us this year


  • DeFi sector became the main driver of the cryptocurrency industry in 2020

  • BeInCrypto’s editors brought together all the industry’s nightmares

  • Someone earned, but most remained at a broken trough

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Decentralized finance has undoubtedly become the main driving force behind the entire cryptocurrency industry this year. However, it was not without scary stories..

Let’s get scared again this Halloween by nightmares in the DeFi sector, from creepy scams and disgusting hacker attacks to blood-curdling price scams..

But first about the good …

Before we dive into the dark side and dive into the vices of the DeFi industry, let’s take a look at the pros. If 2017 and 2018 were the year of ICOs, 2019 was the year of stablecoin, 2020 was definitely the year of decentralized finance..

Billions of dollars in cryptocurrency backing flowed like a river into a growing array of decentralized exchanges, automated market makers and liquidity-growing pools that promised traders and investors rich passive income.

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This figure, known as Total Locked Value (TVL), has grown by nearly 2,000% since the beginning of the year and topped $ 12 billion in October. This growth has led to other records, such as a record number of wrapped (or tokenized) bitcoins. Now their number has reached 147 thousand. DeFi share Decentralized finance (DeFi) is financial services built on the basis of blockchain technology that offer users access to an open, efficient and … More has reached 8% of all ETH in circulation, and 9 million coins trapped in DeFi protocols.

DeFi tokens have performed the best this year, although many of them have dropped a lot lately. Those who already had money became even more rich, many managed to earn extra money, but there are also many who have lost everything. This is where the worst begins.

And it starts with bZx

The first quarter of 2020 turned out to be calm for DeFi, but in early February TVL surpassed the $ 1 billion mark for the first time. In the same month, the first high-profile hacks happened..

The bZx lending and margin trading protocol was the first major casualty of 2020. The project suffered two hacker attacks through flash loans, and the total loss approached $ 1 million in user funds.

The attacker took advantage of Uniswap’s low-liquidity marketplace and executed a single transaction known as a flash loan, which netted him approximately $ 350,000 in profit. They say that a shell does not fall into the same funnel twice. This is not the case. Less than a week later, hackers hacked bZx again and withdrawn $ 600,000 worth of ETH.

In general, bZx and DeFi have received a wave of criticism from detractors and bitcoin maximalists. Many argued that the protocol was in fact centralized, since it managed to stop operations after a breach..

Black Thursday for Maker

DeFi markets bubbled pretty well until mid-March, that is, before the collapse in the global financial and cryptocurrency markets due to the growing Covid-19 pandemic. Ethereum, which serves as a base and launch pad for the DeFi industry, fell 55% in less than a week, triggering a Black Thursday for MakerDAO, the then-leading DeFi protocol..

This event became a black swan that led to the massive liquidation of most of Maker’s vaults, absorbing nearly $ 4 million in Dai token collateral. No one hacked the code, no one stole money, but most of the vault owners lost their security and sued the Maker Foundation, and executives conducted a compensation survey. The team adjusted the stabilization fees and brought the savings rate in Dai to zero, which has not changed since then..

Fool’s Day

In April, the cryptocurrency markets and DeFi industries gradually began to get out of the hole, but the hacks did not end there. The imBTC protocol was attacked on April 18 with the so-called re-entry attack with the ERC-777 token.

The attacker was able to siphon all the liquidity from the Uniswap pool in the amount of $ 300,000 using so-called “hooks” to request additional funds before updating external balances. The coin itself was not affected, unlike those who provided liquidity to the pool.

A few days later, the Chinese lending platform dForce lost its liquidity in the same way. The hacker repeatedly increased his ability to borrow other assets and walked away with about $ 25 million in cash. dForce was accused of copying early Compound Finance code that had no protection against such attacks.

A fruitful summer has begun

By mid-2020, TVL in DeFi has updated its record, approaching $ 2 billion, the heat has come to the young sector.

Drive created Compound Finance, a DeFi protocol that would kick-start lucrative farming that will escalate into fever in the next three months. On the first day of token trading As the use of cryptocurrencies grows, new types of tokens appear. They can represent value or something intangible like voices. Two … More protocols COMP has become the most valuable DeFi asset, with a market capitalization of $ 1 billion. Some have accused centralized exchanges of market manipulation as the hype for COMP grew with prices..

With an increase in capital inflows and cryptocurrency backing, the industry was doomed to new hacks and thefts. In mid-June, a vulnerability was discovered in Bancor smart contracts, through which the attackers withdrew tokens worth $ 460,000, although the platform quickly closed the gap and declared that all funds were safe..

The next victim of the hackers was the DeFi protocol Balancer, which lost $ 500,000 in wrapped ethers as a result of an arbitration attack. The protocol developers stated that the attacker had withdrawn funds from two pools containing tokens with a transfer fee, often referred to as deflation tokens. A series of instant credits and arbitrage token exchanges were carried out during this well-planned invasion.

In July, the bZx protocol returned to the agenda with a controversial token sale that sparked a heated debate over the fairness of DeFi. Trying to jump into the new trend of liquidity mining, bZx launched its own token, which quickly fell into the hands of manipulators. They managed to pump up the price and retire with a profit of almost 500 thousand dollars.

The next month was not without a fair amount of hacks and exploits: in August, a protocol called Opyn was hacked, offering options on Ethereum and DeFi tokens. Hackers stole at least $ 370k in USDC stablecoin through double spending on ETH put options.

Regulations in DeFi and Decentralized Exchanges | What is Coming Next? | Token Metrics AMA

DeFi treats

By the middle of August, the Yam Finance protocol appeared, the pioneer of the fashion for “edible” projects in the field of profitable farming. Billions of dollars in cryptocurrency migrated from protocol to protocol along with degenerate farmers chasing new easy prey.

Yam worked on unverified smart contracts, so a bug was discovered very soon, which led to a revaluation of the governance token. As a result, the platform turned to its whales for help. This was followed by a vote to restart and rescue the platform..

At the end of August, we learned what vampire mining is. SushiSwap – Fork In the cryptocurrency world, a fork is essentially a change in the blockchain protocol. Since cryptocurrencies operate in decentralized networks, all parties … More of the Uniswap protocol – offered the best reward terms and SUSHI tokens. Within a few days, billions of dollars flowed through Uniswap to SushiSwap, and the price of the token went into space.

The ghastly story happened on September 6, when the anonymous creator of the project known as “Chef Nomi” sold his SUSHI for $ 8 million, causing the price of the token to collapse. He then handed control of the protocol over to the head of the FTX derivatives exchange, Sam Bankman-Freed (SBF), who took control of the DeFi whale consortium through a multi-signature smart contract..

The SUSHI value continued to fall and now the token is traded 94% cheaper than the peak values.

Big stand

The clone army tried to replicate the success of SushiSwap by offering eternally hungry farmers useless food-themed tokens. But most were left with nothing.

Some, such as Pizza, Hotdog, and Kimchi, turned out to be “pump and dump” schemes. In the DeFi industry, they are also called a “set-up”. More DeFi clones such as Pancake, BakerySwap and Burger have switched to Smart Chain from Binance to avoid higher transaction fees on the Ethereum blockchain.

Decentralized horror: why the DeFi sector scared us this year

By the end of September, the segment of profitable farming protocols became too crowded and the cost of tokens inevitably went down. Uniswap has become one of the largest protocols this year. The project airdropped UNI tokens for users and opened four pools for mining liquidity, which attracted collateral worth more than $ 2 billion.

Gas crisis

One of the undesirable consequences of this crazy summer was the unprecedented load on the Ethereum network, on the basis of which almost all protocols work..

During the peak of activity in the DeFi segment, which coincided with the launch of pools to grow liquidity on protocols such as Yam Finance, SushiSwap and Uniswap, the average Ethereum transaction fees rose to double digits..

From the end of April, before the “degeneration” began, average gas prices rose by more than 8000%. Ethereum became virtually inaccessible to the average person as transaction fees often exceeded the amounts sent.

Developers have urgently started to introduce second-tier solutions and suggestions for improvements such as EIP-1559. Talk of “Ethereum killers” – Binance Smart Chain, Polkadot, Solana, and NEO’s Flamingo Finance – has returned, which theoretically outperformed Ethereum in many ways. Yet no one managed to kill him..

Millions on the altar of greed

The DeFi nightmares didn’t end there. One of the latest hacker attacks occurred in mid-October, when hordes of profitable farmers rushed into the unaudited and not yet released Yearn Finance protocol smart contract..

Its creator, André Cronier, has published several teasers of his new “gaming multiverse” project called Eminence Finance. Within a few hours, people poured $ 15 million there, and after a few more hours they all went to the hacker.

The burglar returned $ 8 million, but kept the remaining amount for himself. As a result, angry investors started planning lawsuits against Yearn’s team and even tried to launch their platform..

The last terrible event in the DeFi industry happened on October 26, when the Harvest Finance protocol fell victim to a sophisticated arbitrage attack, which lost 24 million dollars in stablecoins in seven minutes..

Draining tokens

By the end of October, most popular DeFi tokens were heading downward, following the trajectory of most altcoins at the end of 2018. Messari’s DeFi Token Profitability Index shows that most new tokens suffer massive double-digit.

Some long-lived tokens, including those from Aave, Loopring, Synthetix, Kyber Network and Gnosis, are still in positive territory since the beginning of the year, but newcomers such as Curve, Swerve, bZx, Sushi, UNI and Compound were already actively expiring by Halloween. blood.

DeFi battle hardened

The story looks like a solid horror movie, but it revealed a real need for cryptocurrency finance, which will take control of investments from banks and directors and return it to investors..

Will always be ready to disregard new technologies and changes, as well as those who prefer to focus on their weaknesses, rather than work to make them stronger and more resistant to such attacks.

As the DeFi ecosystem evolves, these “becoming problems” that have emerged in the past few months will be addressed. New, smarter protocols will emerge, and nightmares will only harden the industry and spur innovation and evolution.

Tokens come and go, and greed remains an integral part of the financial industry, but the history of the cryptocurrency industry shows that the strongest protocols will survive despite all the horrors that plague the sector this year..

What do you think? Share your thoughts with us in the comments and join the discussion in our Telegram channel.


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Decentralized horror: how the DeFi sector scared us this year

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Decentralized horror: how the DeFi sector scared us this year
Decentralized horror: how the DeFi sector scared us this year
Decentralized horror: how the DeFi sector scared us this year

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