DeFi rides on the wave of cryptocurrency hype, but security issues could hinder...

DeFi rides on the wave of cryptocurrency hype, but security issues could hinder its growth

DeFi rides on the wave of cryptocurrency hype, but security issues could hinder its growth

Aron Chen

posted on 1 hours ago

DeFi's market value increased by more than tenfold in the past year, but experts caution that hackers and criminals will take advantege of the general crypto hype and security loopholes in projects.

Decentralized finance, commonly shortened as DeFi in the cryptocurrency circle, gains momentum and grows exponentially as more institutions accept cryptocurrency as alternative assets and payments.

Despite China’s recent crackdown on Bitcoin mining causing the prices of various cryptocurrencies with higher trading volume to plunge heavily, globally speaking, cryptocurrency in general is only getting more closer to mainstream, with top banks like JPMorgan Chase and Goldman Sachs considering to offer crypto investment services to their wealthy clients, and institutions like Visa and MasterCard recently beginning to support digital currency transaction on their networks.  

Ray Dalio, founder of the world’s largest hedge fund Bridgewater Association, changed his position toward bitcoin recently and said he would rather hold bitcoin than a bond, despite the uncertain future of crypto, which could be partially decided by the government regulations.

DeFi, currently one of the hottest applications of cryptocurrency, is riding the wave to draw in even more capital to the market. The concept covers a wide range of banking activities, such as lending, asset trading, and betting activities, etc., carried out almost entirely on blockchain networks, using tokens as proceeds and collateral.

The main goal of DeFi is to become an alternative to the conventional banking sector and replace the traditional technologies of the current financial system with blockchain technologies based on open-source protocols.

“What makes decentralized finance different from traditional finance, is the removal of intermediaries. Instead of interacting with a central authority, its users can gain direct access to the products and services they need,” said Ou Yang, co-founder of Kunben Capital, at the World Digital Asset Summit.

Hu Guoqing, a Shenzhen-based researcher at Peking University, said at the summit that there will be more mass adoption and application of blockchain technologies in DeFi. For example, the Bank of China is already working on cross-border payment and supply chain finance projects using blockchain technologies (WDAS).

The size of DeFi had started surging since the beginning of 2020, and its growth significantly accelerated last summer. 

The total value of assets that are staked and locked into the Ethereum’s DeFi ecosystem increased tenfold in just 8 months from 1 billion US dollars in February 2020 to about $10 billion last September. But the 2020 Defi summer did not define how crazy the market became, as the market potential seemed to have not yet reached a ceiling. According to statistics released by Arcane Research, total crypto value of Ethereum DeFi was at $77.3 billion as of April 25, 2021. Meanwhile, Binance Smart Chain (BSC), another popular blockchain initiated and operated by Chinese cryptocurrency exchange Binance, had also attracted $47.3 billion into its Defi’s project already.

The development of the DeFi ecosystem is still in its very early stage, and relative to the nearly $2 trillion market cap for crypto currencies, and the enormous financial market, the total value of DeFi applications is still very small, at roughly USD6-7 billion, according to estimates shared at the WDAS by Amo Huang, the CTO of OIN Finance.

“Despite scalability and structural problems, such as higher Ethereum gas fees, DeFi’s application has a lot of room to grow. Other potential growth areas include payments, non-fungible tokens and derivatives,” said Ticky Chen, head of China Marketing at Kava, a cross-chain DeFi lending platform, “with the upcoming launch of Layer 2 solution on Ethereum, there is much more innovation in DeFi space coming in the near future. Other public blockchain like Polkadot, BSC, and Solana will certainly keep pace with Ethereum and grow their Defi ecosystem, but they will not eat Ethereum’s pie.”

Although the hopes are high, some industry analysts remain skeptical about DeFi. One of their biggest concerns is DeFi’s safety issue, as a vulnerability in the projects’ smart contract code could lead to hacks that may cause hundreds of millions of real dollars in loss, as many such projects are already very big.

According to a report released by CipherTrace, losses from cryptocurrency theft and hacks in decentralized finance hit an all-time high in the first four months of 2021.

Previously, SlowMist, a blockchain safety company running a DeFi project on BSC, was hacked and suffered a loss of about $50 million. More recently, yield-farming aggregator PancakeBunny had suffered a flash loan attack, causing the value of its DeFi token to crash by more than 95%.

The CipherTrace report also stated that as of the end of April, more than 50% of the crypto crimes were related to DeFi projects, with a combined loss equivalent to $240 

“Hackers and criminals will take advantage of the security loopholes and hype as more money flows into the space from retail investors,” cautioned Dave jevans, CipherTrace’s CEO, “those criminal will seek projects that have launched without adequate security audits, so they can take advantage of it and attack.”