Decentralized Finance (DeFi) emerged as a viable alternative to Traditional Finance (TradFi) but it seems to be losing the race. Since its inception, DeFi has promised to offer revolutionary solutions and challenge the traditional banking system at its core. But its underlying complexity exploits and hacks restricted it from being mainstream.
DeFi Losing the Race to be Mainstream
DeFi allows nearly everything that a traditional banking system does but replaces the intermediaries with blockchain. Quick and easy cross-border transactions circumventing the bank’s requirement presented a strong premise. Like every technology, it initially garnered colossal funding and investment but certain factors pushed the money away.
Exploits, scams, and hacks dwindled people’s trust in the technology, and experts say that the following are the weak points: wallet hacks, Ponzi schemes pretending to be DeFi, and exit scams. There have been many famous hacks exploiting these pressure points.
A hacker can hack a wallet, like getting a key to someone’s bank account. Conic Finance lost $3.8 Million in July 2023; many have lost considerable amounts. Hackers exploit the read-only reentrancy where a brilliant contract bug makes intelligent contracts susceptible to hackers.
Bad actors pose to be legitimate decentralized finance projects and these Ponzi schemes generate massive revenue in the process. As per the 2022 data, DeFi ponzi losses accounted for $7.8 Billion. Though it is a small number compared to the whole cryptocurrency scenario, it still hampers the overall image.
Exploiters also pull a dirty game called exit scam, which falls under rug pull. In this scenario, a founder excessively promotes the project, sometimes portraying it as too good to be true. Investors fall for it and invest massive amounts but when the investment reaches a desired number, they abandon the project and disappear.
Major Exploits that Dented DeFi’s Image since 2020
In 2020 alone, the crypto industry witnessed 17 significant attacks on DeFi, with a total loss of around $154 Million. On February 15, the bZx protocol was exploited twice in 4 days and lost around $900,000. On April 19, Lendf.me reported that its total value locked (TVL) fell from $25 Million to $10,000 in just 24 hours.
On October 26, Harvest Finance lost $24 Million, becoming a noteworthy hack of 2020. Warp Finance, a lending platform, lost $7.7 Million to a flash loan attack on December 18, 2023.
In 2021, DeFi lost around $2.4 Billion to hacks and exploits. This was a 1,330% jump compared to 2020. On July 23, 2021, THORChain suffered a major exploit worth $140,000. Another exploit worth $4,900,000 took place on July 15, while the third exploit was $8 Million. Many more exploits occurred during the span.
While in 2022, the total losses were around $471.43 Million in the first half, all these losses hampered DeFi’s image. Retail investors feared that DeFi could implode and get hacked anytime. Hence, they started moving out the funds, further declining the TVL.
Reasons Which are Holding DeFi Back
All these DeFi exploits and hacks not only incurred monetary losses to its users but also pushed it far back in the race to be mainstream. Experts have listed the following reasons for its lackluster track record. First is the security concern; investors started to believe that DeFi is too easy to hack and shall always be a hackers’ favorite. All these hacks and exploits pulled away investors’ trust in the technology.
Decentralized finance and the crypto industry are in dire need of a regulatory framework. However, as the technology is decentralized, lawmakers need help preparing a regulatory framework for DeFi. Moreover, its complexity steers away non-technical users. If people enter without proper knowledge, they can lose a considerable amount.
No one doubts the potential of decentralized finance but it still needs time to evolve and a lot of alterations to be a worthy opponent of traditional finance. Maybe the upcoming DeFi 2.0 solves these underlying problems.