Just because crypto is decentralised, doesn't mean the risk isn't centralised

Are you sick of feeling limited by traditional financial services and intermediaries? Ready to break the bonds of a centralised economic system and take control of your financial future? Welcome to DeFi – the financial revolution that’s shaking up the cryptocurrency and Blockchain industry and bringing the power of financial services to the people. For those in developing countries or those who don’t have access to traditional economic systems, DeFi offers an inclusive, open, and transparent way to access financial services and products. But is it really as decentralised as it claims to be? Let’s take a closer look, shall we? We’ll explore how DeFi isn’t living up to its decentralised promise and how we can make it even more accessible and secure.  

 

Decentralisation might give you a false sense of security, but there are still plenty of risks in investing in cryptocurrencies and blockchain-based assets. With volatility being one of the main risks, it’s important to be aware of the potential pitfalls, like when Elon Musk turned Dogecoin volatility into a fortune, but you could also lose it all in one go. There’s also the risk of theft or hacking that can leave you high and dry, and the ever-changing regulations that could make the environment difficult to navigate.  

 

There are cases where certain projects are using the term ‘decentralised’ more as a buzzword rather than actually being decentralised. For example, many projects are having a few key players that hold a major power and decision-making power over the protocol and project, and that makes it centralised in nature. 

 

So before you jump in, it’s essential to do your homework, understand the risks, and manage them carefully.  

Decentralised Robbery

Now let’s talk about the elephant in the room, hacking, and theft! Despite being more secure than traditional financial systems, Blockchains and cryptocurrencies are still vulnerable to malicious attacks and there have been several instances of large-scale theft in the past. 

 

First up, we’ve got the Binance Bridge Hack. This was a real hoot! On October 7th, 2022, the cross-chain bridge that powers the Binance Coin (BNB) ecosystem was hacked. The Binance Smart Chain (BSC) was temporarily suspended by Binance after it was discovered that a vulnerability had been exploited. The attacker was able to issue 2 million BNB, worth approximately $566 million, on October 6th, 2022, through two transactions of 1 million BNB each. Can you believe it? Binance, the giant in the crypto world, had to temporarily suspend its own blockchain, the Binance Smart Chain (BSC). I mean, talk about irony! Here’s this cutting-edge decentralised technology, with all its fancy smart contracts and immutability, and it can still be stopped by a single authority. It just goes to show that even the best-laid plans can still fall victim to good old-fashioned human error. But, on the bright side, it also shows the importance of constant security monitoring and review, because in the world of crypto, you snooze, you lose. Just imagine, a cool $566 million worth of BNB gone in two swift transactions! I’m sure the attacker had a good laugh while they made off with all that loot! 

 

Next, we have the Nomad Bridge Hack. This one was a real doozy! You can call it a “Decentralised Robbery”.  In August 2022, we saw the Nomad token bridge come under attack, resulting in a massive $190 million being siphoned out of the Nomad liquidity pool. This made it one of the biggest DeFi hacks in history and one of the most chaotic, as the technique used to steal funds required little technical knowledge. This led to a frenzy of cash-grabbing copycats as soon as news of the exploit spread on social media. 

 

It’s not just the Nomad token bridge that fell victim to these attacks. The Ronin Bridge was also hacked in March 2022; with around $600 million stolen, while the Harmony Bridge was attacked in June 2022, resulting in a loss of around $100 million, it was as easy as taking candy from a baby! 

 

These incidents show that even with the decentralised nature of cryptocurrencies and Blockchains, there’s always a risk of hacking attacks. It’s crucial for organisations to have strong security measures in place to prevent such incidents and minimize the damage if they do occur. Otherwise, it’s just a waiting game for the next big DeFi hack! 

 

 

In the next sections, we will explore the various ways in which DeFi is not truly decentralised and discuss potential solutions to address these issues. 

Centralised Control

In the world of DeFi, we’re talkin’ about a financial revolution – goodbye centralised banks, hello decentralised vibes! But, hold up, it’s not all sunshine and rainbows. You see, sometimes the “decentralised” label can be deceiving. Sure, no single entity controls the flow of funds, but often times a small group of individuals or organisations hold the power to make decisions that could impact the entire project. 

 

Take, for example, the DeFi project controlled by a small group of developers with a huge chunk of tokens. They hold the power to make changes to the smart contract code or governance structure, but the real question is, do they have the community’s best interest at heart? This is where the ‘Squid Game Rug Pull’ comes into play. As the story goes, a small group of developers created a DeFi project, held a large number of tokens, and had complete control over the project. It seemed like a good idea at the time, but it wasn’t long before they started to make decisions that only benefited themselves and not the wider community. This ‘rug pull’ resulted in significant losses for the users and a lack of trust in the project. 

 

It goes to show that when centralised actors have too much control over a project, the community, and users can suffer the consequences. To avoid such scenarios, DeFi projects must strive for decentralisation and ensure that their governance structures are transparent and accountable. This means that changes to the code or governance structure should be voted on by the community and that the project should have clear rules and regulations about who holds what tokens and what role they play.  

Centralised Infrastructure

Oh boy, let’s talk about the challenges of DeFi! Have you ever heard of the saying “too much of a good thing can be bad”? Well, that’s what we’re looking at with DeFi and centralised infrastructure. 

 

Imagine a DeFi ecosystem made up of beautiful and complex smart contracts, but it all relies on centralised exchanges, oracles, and other centralised entities. It’s like putting all your DeFi eggs in one centralised basket. Eeks! 

 

For example, let’s say a centralised exchange holds a huge chunk of the trading volume for a DeFi token, this gives them massive power over the token’s price, and they could potentially manipulate the market to their advantage. Or, if a centralised oracle service is used to determine the value of an asset, it’s like giving them a magic wand to change the price of the asset, which could lead to financial losses for innocent DeFi users. 

 

But wait, there’s more! The reliance on centralised entities also leaves the DeFi ecosystem vulnerable to the same issues that centralised systems face, like security vulnerabilities, regulations, and downtime. It’s like having a castle made of jellybeans, it looks sweet but it’s not exactly sturdy. 

 

Now, let’s contrast this with the bright side of a truly decentralised financial system. It’s like the Wild West, but with money. With DeFi, we get a chance to create new and innovative financial products and services. The protocols are open-source and can be easily built upon, creating a thriving ecosystem of developers and start-ups. 

 

Plus, decentralisation means that in the event of a failure or attack, the rest of the system can continue to operate. It’s like having a squad of backup dancers, even if one falls, the show must go on! And, there’s no one point of control, making DeFi less susceptible to censorship or manipulation. 

Possible Solutions for DEFI Risk Mitigation

The DeFi world is full of twists and turns, but one thing’s for sure; we need to make sure that our decentralised finances stay, well, decentralised! We can’t have a few power players hogging all the control, now can we? 

To steer the DeFi ship in the right direction, there are a few key solutions that need to be put into action: 

 

  • Get Governing: Let’s give the people the power they deserve! Decentralised governance empowers the community to make decisions about the project’s future, leaving no room for a single entity to control the wheel. 
  • Cut the Cord: No more dependence on centralised infrastructure, we’re breaking free! Decentralised exchanges (DEXs) and decentralised oracles provide the trading and price discovery services we need, without the strings attached. 
  • Be a Show-Off: It’s all about transparency, baby! Regular updates, smart contract codes made available for review, and regular audits ensure that our DeFi projects are on the up and up. 
  • Get Involved: The more the merrier! Community participation ensures that everyone has a say in the direction of the project, creating a more inclusive and accessible financial system. 

 

Let’s make sure we don’t have any monkey business happening in our DeFi world. Regular code review and on-chain security monitoring keep our projects safe and secure. So, let’s steer DeFi towards the land of the truly decentralised, where everyone has a say and the possibilities are endless. These issues are just a couple of examples that showcase the risks associated with decentralised exchanges and the need for better security practices in the DEFI space. The decentralised world of cryptocurrencies and Blockchains may seem like a wild west of sorts, but it’s important to be aware of the risks associated with these investments. Just because they’re decentralised, doesn’t mean the risk is centralised, so make sure to thoroughly research and understand the potential risks before jumping into the crypto rodeo. 

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Kurt Schrauwen

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