What Are the Lessons from Major DeFi Protocol Failures?

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What Are the Lessons from Major DeFi Protocol Failures?

In the ever-evolving world of decentralized finance, even the most prominent protocols can face unexpected challenges. We’ve gathered insights from Founders, CEOs, and other leading experts to dissect seven pivotal DeFi setbacks, from IronFinance’s collapse to the DAO hack, and the critical lessons these incidents have imparted on the industry. Want to get right into the answers? Then check out these major DeFi protocol failures.

  • IronFinance’s Collapse Teaches Risk Management
  • Poly Network Hack Exposes Security Flaws
  • TerraUSD’s Fall Stresses Diversification
  • bZx Attack Reveals Oracle Vulnerabilities
  • Terra-Luna Debacle Prompts Risk Assessment
  • Yearn.Finance Hack Shows Audit Necessity
  • DAO Hack Advocates Proactive Security

IronFinance’s Collapse Teaches Risk Management

IronFinance’s collapse in June 2021 is a notable example. Their IRON stablecoin, partially backed by TITAN tokens, crashed when large holders sold TITAN, triggering a “bank run.” Lessons learned include the dangers of over-relying on algorithmic stability, the need for better stress-testing, and the importance of implementing circuit-breakers in DeFi protocols.

Ryan Doser
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Ryan Doser
Co-Founder, AI Insider Tips


Poly Network Hack Exposes Security Flaws

The August 2021 attack on the Poly Network is a major example of DeFi protocol failure. Poly Network is a cross-chain interoperability protocol that facilitates the transfer of digital assets between different blockchain networks. On August 10, 2021, Poly Network was hacked, resulting in a loss of approximately $610 million in digital assets.

The attack highlighted several security vulnerabilities in DeFi protocols, including the lack of proper security measures and the need for stronger validators. It also emphasized the importance of emergency response plans and communication in the event of a security breach. Furthermore, the attack served as a reminder that collaboration between different blockchain networks and projects is essential in improving the overall security of the DeFi ecosystem.

Dhari Alabdulhadi
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Dhari Alabdulhadi
CTO and Founder, Ubuy Netherlands


TerraUSD’s Fall Stresses Diversification

One notable DeFi protocol failure was the collapse of the TerraUSD stablecoin, which dramatically lost its peg to the dollar. This incident underscored the critical need for robust risk management and transparency in DeFi operations. From this, the lesson at Wild Creek Web Studio was clear: always diversify investments and rigorously test new technologies in controlled environments before full-scale implementation. This approach has significantly fortified our strategies against similar vulnerabilities in the digital landscape.

Praveen Kumar
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Praveen Kumar
Founder, Wild Creek Web Studio


bZx Attack Reveals Oracle Vulnerabilities

The question is quite challenging because we experienced several hacks just last month, making it difficult to pinpoint ‘the best one.’ If I had to choose, the first attack that comes to mind is the bZx flash-loan/oracle attack, where attackers exploited loopholes. The entire operation was highly complex.

We can extract several key lessons from this situation:

1. Oracles are highly vulnerable. It’s worth using secure and multiple oracles. By aggregating data from various sources, we can ensure more reliable information. For instance, ByBit faced a similar issue with the USD/PLN pair and the Google API.

2. Increased third-party audits – This applies not only to web3 projects but across the board. More thorough audits can help identify vulnerabilities before they are exploited.

3. Mechanisms for monitoring suspicious activities – e.g., large flash loans, and preventing other activity when they’re detected.

4. Bigger liquidity pools for better slippage control and mechanisms that prevent activities on low-liquidity assets.

DeFi Legos or Money Legos are connected. What is their advantage on the one hand, might be their disadvantage on the other. Restaking might be the next ticking bomb.

Sebastian Malczyk
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Sebastian Malczyk
General Manager, Experienced Tech & Product Advisor Fintech, Insurtech, Miquido


Terra-Luna Debacle Prompts Risk Assessment

When the Terra-Luna collapse happened in 2022, it highlighted the fragility of some DeFi protocols. The rapid devaluation led to massive losses and eroded trust. This incident underscored the need for rigorous risk assessment and diversification. At Yellowhammer Home Buyers, we learned that even in traditional real estate, it’s crucial to evaluate all potential risks and ensure we have solid fallback strategies to safeguard our business and clients.

Brandon Hardiman
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Brandon Hardiman
Founder, Yellow Hammer Home Buyers


Yearn.Finance Hack Shows Audit Necessity

One major DeFi protocol failure was the 2020 hack of the Yearn.Finance protocol, where attackers exploited a vulnerability in its vault system, resulting in significant losses. The key lesson learned was the critical importance of thorough security audits and regular code reviews. Ensuring that smart contracts are rigorously tested and reviewed by multiple independent parties can help identify potential vulnerabilities before they are exploited. This incident highlighted the need for robust security practices to protect DeFi investments and operations.

Yarden Morgan
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Yarden Morgan
Director of Growth, Lusha


DAO Hack Advocates Proactive Security

The DAO hack of 2016 was a wake-up call, showing that even advanced DeFi protocols can falter without proper security. It highlighted the need for rigorous code audits and robust risk management. In FuseBase, this lesson translates to ensuring our automation tools are rock-solid, preventing vulnerabilities. The takeaway is that continuous vigilance and proactive security measures are essential to prevent such failures and protect user trust.

Paul Sher
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Paul Sher
CEO, FuseBase


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Block Telegraph Staff

BlockTelegraph is the leading blockchain news publication, covering NFTs, DApps, and the decentralized finance industry.