This is part 2 of my article about the most common DeFi security risks.
We will cover the last three DeFi security areas, where security threats could occur and suggestions on how they can be mitigated:
Oracles
Multi-signature technology
Flash loans
So let's go.
Oracles are a crucial component of DeFi and allow smart contracts to interact with the external world and allow for faster transactions.
Oracle databases provide a powerful and efficient means of storing, accessing, and managing large amounts of data. But, like any technology, they are not infallible and can suffer from several issues, such as system outages, data loss and security breaches.
These Oracle failures, if not caught and addressed quickly, can have widespread and potentially catastrophic effects.
For example, in November 2020, DEX Compound lost $89 million to an accidental liquidation of some of its holdings. What caused this cataclysmic event? Bad data.
CoinbasePRO, instead of feeding Compound's smart contract the normal price of the DAI, one dollar, it fed it a dollar thirty, triggering liquidation because the loans were under collateralized. And as a result, the borrowers lost their money, and the market was shaken.
To reduce the chances of an Oracle failure, organizations should implement a comprehensive approach to security. This includes:
• Regularly monitoring and auditing the oracle system
• Implementing a system of checks and balances to ensure the accuracy and reliability of data
• Using secure protocols for data transmission
• Developing robust backup protocols in case of failure
Multi-signature technology is cryptography that requires multiple signatures from different individuals to allow a transaction. It’s used in DeFi to increase security by requiring multiple approvals before a transaction can be executed.
Examples of multi-signature failures and their consequences Multi-signature technology can fail if the signatures are not obtained, or if malicious actors gain access to the system. This could lead to unauthorized transactions being executed, funds being stolen, or other malicious activity.
For example, in July 2017, Parity multi-sig wallet software was hacked. 150,037 Eth was stolen. The second-largest heist in Ethereum History. A bug allowed the miscreants to take over their victim's wallet with a single transaction.
Organizations should take steps to ensure the security of their multi-signature systems, including:
• Using secure protocols for data transmission
• Implementing strong authentication methods for users and devices accessing the system
• Regularly monitoring and auditing the system for suspicious activity
• Establishing clear procedures for approving transactions and revoking access when necessary
Flash loans are short-term loans that can be taken out and repaid within a single block on the blockchain. They're used in DeFi as a way to quickly access liquidity without having to go through traditional lending processes.
Examples of flash loan failures and their consequences Flash loans can be risky due to their short-term nature, as borrowers may not have enough time to properly evaluate the risk associated with taking out such a loan. Additionally, if the borrower does not have enough collateral or liquidity to repay the loan, it could cause significant losses.
Last year in October, Quickswap, Uniswap DEX fork, lost $220,000 in an exploit involving flash loans.
Organizations should take steps to ensure the security of their flash loan systems, including:
• Establishing clear rules and regulations for borrowers
• Requiring adequate collateral before approving a loan
• Using secure protocols for data transmission
• Regularly monitoring and auditing the system for suspicious activity
By following these guidelines, organizations can reduce their exposure to DeFi security risks while still taking advantage of its many benefits.
As DeFi continues to gain traction, it is important to understand the common security risks that come along with it. By understanding these risks, it allows users to make more educated decisions and protect their assets.
We've explored three common security risks associated with DeFi in part 2.
Oracles Multi-sig technology flash loans Organizations should take steps to mitigate these risks, such as establishing clear rules and regulations for borrowers, requiring adequate collateral before approving a loan, using secure protocols for data transmission, and regular monitoring and auditing the system for suspicious activity.
The current state of our world is constantly changing and an individual's responsibility to stay informed and take action to mitigate risks is more important than ever.