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The cryptocurrency industry has had a stellar 2020 in most regards and is on the verge of a bull run. But even with a definite growth in maturity, the space has some tough challenges to overcome. Not the least of these are security incidents, which have resulted in millions of dollars lost.
However, unlike in previous years, the rate of hacks and crimes has slowed down in the blockchain space as a whole. DeFi seems to be the new breeding ground for malicious actors. The burgeoning niche has become a target for many hackers, who seek to exploit the mania.
Hacks in the Blockchain Space Have Declined in 2020
CipherTrace, a blockchain intelligence firm, reported just a few days ago that losses from thefts, hacks, and fraud dropped by $1.8 billion from the same time last year. That puts this year’s losses at $2.7 billion so far, as the market lost $4.5 billion in 2019.
There are a few clear reasons as to why the losses have been reduced since 2019. Primarily, exchanges have increased their security, as 2019 saw some large hacks that tarnished reputations. Binance was only one of many exchanges that was hacked, losing a whopping $40 million.
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The industry as a whole has stepped in to combat incidents of exploits, direct hacks, and phishing attacks. The market has been compelled to do so with the entry of more hedge funds and a greater swathe of the public.
20% of Hacks in Crypto Space Are From DeFi
However, the CipherTrace report also noted that the number of hacks in the DeFi niche had increased. This is not very surprising, given that the space is very new and that many untested protocols are launching. Several of these hacks are directly a result of unaudited smart contracts that are taken advantage of by bad actors.
Hackers have targeted DeFi because of the amount of money that has moved in 2020, which has tripled from 2019. The untested nature of protocols and the sudden surge have made it easy prey. The tendency of some protocols to launch by forking off of an existing protocol has only added to the problem.
One of the most concerning hacks was bZx — not because of the value lost, but because of the fact that it was hacked three times. It lost over $10 million. Harvest Finance, one of the most recent victims, lost a staggering $34 million, making it one of the most high profile cases of the year.
The hacks are significant enough to account for 20% of all losses in 2020 — a massive jump from the insignificant ons in 2019. That puts total losses at about $100 million, at least according to CipherTrace.
In addition to hacks, there is the issue of unaudited code. The YAM Finance protocol, another yield farming scheme, possessed a bug that saw $500,000 permanently locked away. These occur only because the smart contracts are not audited well enough — if at all.
DeFi is Learning Lessons
But DeFi also appears to have learned its lesson. With many early pains mostly out of the way, teams now understand that it is vital that all code is audited. More companies are offering security services to DeFi projects, which is now established as a mainstay of the market.
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Some protocols have begun to put in place insurance funds to ensure that investors’ capital is protected. Almost all are now auditing their code and emphasizing it to investors, who take it as a major sign of safety.
The end result is that projects will show more reservation before launching a new protocol. The DeFi mania seems to be subsiding and with it the end of massive inflows of cash. Investors have mellowed their expectations and projects are now bolstering basic infrastructure — putting DeFi in a phase of maturity.
While it’s disappointing that hacks have occurred at all, it is not surprising given the newness and nascency of the space. These are growing pains, and the sooner they are dealt with, the better. Projects in the DeFi space have made it a point to audit their contracts and not release developments before they’re ready.
The DeFi craze has largely subsided, even if it is at its all-time high in terms of total locked in value. We will now see the market grow at a slower pace, paying more attention to fundamental features that protect investors.
Do you think there will be a massive improvement in crypto security next year? How will DeFi change? Let us know in the comments below.