Decentralized Finance (DeFi) is a fast-growing space. According to a report, the DeFi industry touched a US$ 239 billion valuation in 2022. Another report predicts that the compound annual growth rate (CAGR) will expand by 42.5% between 2022 and 2030. This high growth is attracting threat actors with eyes on the massive money. To ward off emerging threats, companies must invest in DeFi cybersecurity.
What is Decentralized Finance (DeFi)?
DeFi is the fastest emerging financial technology, leveraging secure distributed ledgers based on those used by cryptocurrencies. This financial ecosystem works on blockchain technology that enables buyers and sellers to transact financial assets and services without the involvement of a middleman (banks and brokerages). DeFi challenges the existing centralized financial system by entrusting participating parties with peer-to-peer digital interactions.
DeFi eliminates various disadvantages of the centralized system of finances, like the bank service fee, private data leakage, and centralized authority over financial regulations, among others. DeFi uses dApps to run financial transactions through the blockchain. These apps generate and store a private key that are unique for each user. These keys should be kept secure as it is used for transactions using DeFi.
What is DeFi cybersecurity?
DeFi is the new popular technology in the crypto industry, and as such, it has become a target for exploitation by cybercriminals. Securing the systems with DeFi cybersecurity is essential for smooth functioning. Also, according to Chainalysis's report, between January 2021 and March 2022, seven out of ten crypto thefts involved DeFi protocols. Attackers also exploit various vulnerabilities in DeFi technology. For instance, scammers set up honeypots to lure retail investors, causing damage of millions of dollars to the decentralized financial ecosystem.
What are the top DeFi cybersecurity risks?
Exploiting vulnerability: Cybercriminals look for ways to exploit vulnerabilities in wallets, browsers where DeFi transactions occur, crypto exchange platforms, and web applications. Cybercriminals often uncover and exploit coding and business logic errors to take over the DeFi accounts. An example is an exploit on the cross-chain token bridge Nomad involving stealing around US $200 million.
Lost private keys: The decentralized finance sector has a well-known saying: "Not Your Keys, Not Your Crypto." Suppose a criminal gains access to your private key by compromising your dApps' key management or decentralized finance wallet. In that case, they can steal it in seconds. The attack vector of compromised private keys challenges the DeFi protocol and the entire system.
Honeypots: DeFi scammers use this technique to lure investors by pushing the token price substantially through manipulation. Honeypot scammers can control the wallet with permission to sell the tokens, leading to DeFi cybersecurity risks. Investors must be wary of the potential dangers of this scam.
Crypto-theft: Infiltrating the crypto-exchange security systems is a significant threat. Crypto exchanges are centralized exchanges holding private keys on behalf of the DeFi account users who purchase and trade tokens. While such a custodial structure enhances transaction speed and customer support, any data breach or crypto theft in the centralized exchange can disrupt the regular DeFi ecosystem.
FBI warns about DeFi cybersecurity risks and problems
On August 29, 2022, the FBI's Public Service Announcement warned decentralized app users and investors about Smart Contract vulnerabilities discovered on DeFi platforms. The PSA report says, "Cyber criminals stole US $1.3 billion in cryptocurrencies, almost 97% of which got stolen from DeFi platforms." FBI recommends that investors and users do thorough research on DeFi platforms. Investors should ensure that the apps and platforms implement comprehensive cybersecurity audits.
Prevention techniques against DeFi cybersecurity threats
Here are some prevention techniques that DeFi crypto-system owners and companies can leverage to stay ahead of DeFi cybersecurity threats:
Enterprises should pay attention to security testing and penetration testing techniques after developing a DeFi app but before launching it.
Users should update security patches and software fixes regularly.
Enabling multi-factor authentication (MFA) in decentralized finance apps can help protect private keys from illicit hackers.
Companies must cooperate with cybersecurity experts to reduce the attack surface.
The DeFi ecosystem should simultaneously perform high-quality smart contract audits by two auditors (at least). Also, the two auditing third parties should not interact with each other.
With the exponential growth of DeFi systems in the crypto industry, DeFi cybersecurity risks have risen. App and platform developers, as well as users, should take preventive measures to stay safe from online threats. Some of the significant risks in DeFi are exploiting vulnerabilities, lost private keys, honeypots, and crypto theft. FBI has already warned about such risks in their PSA report. To avoid these risks, enterprises should consider implementing the preventative measures listed above.