The world of decentralized finance (DeFi) is a mysterious place filled with many opposing ideas and concepts. While some claim that the sector is the future of finance, describing today’s protocols as ‘self-driving banks,’ others think of DeFi as a nesting ground and safe haven for hackers.
With the market’s exponential rise in 2020, both users and developers gained access to a range of opportunities that make our lives easier. But truth be told, there are plenty of pretty nasty sides to DeFi and its community.
Anonymous teams, rug pulls, multimillion-dollar hacks, and various other factors prevent newcomers from joining the market and becoming investors. We are still living in the digital wild west much like our ICO predecessors have in 2016/17. Years have passed since the last bull run but little has changed.
This time around, should we again wait for men in suits to ‘fix’ our problems with tight regulations, or should we the users take a stand and change DeFi for the better?
Problem #1: Hackers and smart contract fallibility
Before utilizing any problem-solving strategies, one should always analyze the problem itself to find the root cause via causes and effects. We know that DeFi is a problematic and dangerous place but the questions of why and who still remain.
As a product of the internet that possesses inherently complex technological features, cybersecurity is the first aspect that we should analyze. Due to the fallibility of both smart contracts and humans (which have one common denominator), security appears to be the number one problem that still pervades the market.
Akin to a ghost, terrible security measures and poor code reviewing skills haunt developers who fail to focus on security. As you can tell, this leaves much room for a black hat hacker whose life energy is fueled by finding new exploits.
Everyone can learn to write a smart contract only after a few months of spending time with Solidity. However, few gain the necessary expertise needed to protect a smart contract from being exploited. When playing around with a small project for fun, security may not seem like a big deal. But when a developer creates a protocol that hosts millions of dollars in collateralized assets, security is more than essential.
In 2016, the Ethereum smart contract ecosystem faced similar threats. Naturally, this prompted its creator Vitalik Buterin to write a blog post on the matter. Buterin discussed the complexity of smart contracts and how susceptible they are to exploits. He further stated:
“My personal opinion regarding the topic is that an important primary conclusion is the following: progress in smart contract safety is necessarily going to be layered, incremental, and necessarily dependent on defense-in-depth. There will be further bugs, and we will learn further lessons; there will not be a single magic technology that solves everything.”
DeFi accounts for 50% of all crypto hacks
Four years have passed since the greatest smart contract developer made his comment and the situation remains the same. A November report from CipherTrace, a reputable crypto cybersecurity platform, revealed that half of 2020’s crypto hacks came from DeFi protocols and exchanges.
Their team notes that if it were not for the Kucoin centralized exchange hack, DeFi would roughly account for 50% of 2020’s crypto hacking volume. Such a situation creates fear not only for investors but for global regulators as well.
Problem #2: Anonymous teams and rug pulls
In the first section, we have discussed one part of the story by talking about the influence and actions of legitimate smart contract developers. But what about those who rid investors of their assets through scams?
Neither crypto nor DeFi offers the first environment for online scams. Giving its users a virtual cloak of invisibility, the internet’s anonymous feature makes it possible to steal without repercussions.
Rug pulls, anonymous teams and scammers represent the dark side of DeFi. The case of scamming in this market is even worse as single individuals manage to steal millions. Certain individuals had the chance to scam in an incredibly short timespan while having limited technical expertise.
Abnormally high returns resulted in investors becoming greedy and buying new DeFi tokens without conducting their due diligence. However, this is ultimately not the real problem here.
Even in cases where a project appeared presentable and had a nicely written smart contract, due diligence was not enough to anticipate an exit scam from the creator’s behalf. Developers still work anonymously and even this year we have a consistent flow of rug pulls.
Will DeFi forever stay stuck with rug pulls that give cryptocurrencies the same criminal tone in the same way that the silk road did for Bitcoin? Or do we finally have access to solutions that make both problems less frequent if not non-existent altogether?
DeFi’s newest solutions: LIFTOFF & Crash Insurance
Liquidity Dividends Protocol LID Protocol announced two new features last week. The two of them have the ability to revolutionize the DeFi presale market. Named LIFTOFF and Crash Insurance, these features work together to protect investors and those wishing to trade with less risk. How? By offering investors an entirely new way to buy DeFi tokens.
Numerous exchanges have in the past created so-called Launchpads that reviewed and curated new project listings. LID Protocol’s LIFTOFF is the first such launchpad that, in the spirit of decentralization, features self-service.
Developers and users can list tokens via LIFTOFF just like they would on Uniswap. The core difference is that the platform gives potential investors more protections and benefits that are definitely sought by many.
The team believes that such a service can lead to greater levels of trust and more contributions from DeFi investors. But why is LIFTOFF so tempting exactly?
First off, it enforces locked liquidity, no team tokens, and weekly ETH payouts for the developers of a project. Secondly, the Crash Insurance feature fully refunds investors in case things go awry. Both developers and investors win in this environment (which has no room for controversy). With these aspects in mind, It is easy to imagine why the DeFi community might urge its developers to hold presales via LIFTOFF.
For the issue of smart contracts and exploits, Lid Protocol works with Halborn Cybersecurity. With their help, they conduct full and extensive code reviews of all the approved projects.
LIFTOFF might not be the perfect solution but it could definitely work more efficiently compared to what other decentralized and centralized exchanges offer. With features that improve security and lower risk, LID Protocol’s service undoubtedly has the chance to change DeFi for the better.