Syed Rahman considers the concerns that have been voiced about customers’ assets being vulnerable.
Chainalysis’ CEO Jonathan Levin has made it clear he is worried about what he believes to be security shortcomings in decentralised finance (DeFi).
In an interview with the Financial Times, he stated that the rapid growth of these cryptocurrency platforms, which operate on blockchains and without intermediaries like banks, has meant that customers’ assets are at risk of being attacked.
According to him, everyone in on-chain finance is solely focused on increasing the value in the sector, rather than considering the security that is required on such platforms.
Data shows that DeFi protocols (automated programmes built on public blockchains that provide financial services) hold over $140 billion in crypto assets worldwide. This year has seen some of them undergo a huge rise in popularity as investors look to new ways of increasing revenues, such as by lending out crypto tokens.
But security is certainly an area of concern. To take one example, this month has seen more than $100 million taken from the DeFi protocol Balancer.
Jonathan Levin stated that the security of DeFi platforms “hasn’t really been considered by people who raise a bit of venture capital money’’ and cited the risk of attack from North Korea. He has previously referred to the rise of blockchain technology and the resulting reliance that banks have placed on it; with billions of dollars now moving across it while being held by traditional financial institutions.
Issue
The main issue with DeFi protocols when comparing them to traditional finance products is the size and the scale of the operation. In many instances, the rise of such platforms has involved what tend to be smaller ventures that have lean teams who do not, at least initially, have much focus on security.
As they grow and develop, they do then tend to start taking security more seriously. But the natural, do-it-yourself attitude that has inspired this sector has seen it develop away from the safety nets of traditional finance. It may be unrealistic, therefore, to think that this is an issue that will ever entirely be tackled. And unfortunately, as the DeFi space continues to grow, there is a larger and larger incentive for bad actors to attack what they believe to be the weakest link in the system in order to make illegal gains.
It is, therefore, important that customers do as much due diligence as they can into these platforms before using their products. They have to recognise and understand the inherent risks. And this may lead to further growth in satellite industries such as, for example, DeFi insurance, which is an area that is already worth more than US $1 billion.
