Will DeFi Ever Be Totally Safe? Can AI Help?

By Michael @ CryptoEQ | CryptoEQ | 6 Dec 2023

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The transformative power of decentralized finance (DeFi) lies in its ability to streamline financial services. DeFi reduces friction and overhead costs by leveraging efficient code, eliminating the need for physical locations and large human teams. This shift has been pivotal in reducing costs in several ways:

  1. Friction Costs: DeFi is expected to reduce friction costs, including gas fees, over time.
  2. Overhead Costs: By replacing physical infrastructure with digital code, DeFi significantly cuts down on overhead expenses.
  3. Human Resources: DeFi's reliance on code rather than large teams of bankers replaces the need for extensive human labor, thus reducing costs associated with staffing.
  4. Accessibility: DeFi democratizes financial services, enabling virtually anyone to offer services like lending and market making.


DeFi Risks

In DeFi, the traditional concept of counterparty risk is replaced with software security risk. The integrity of one's assets and the efficacy of transactions are contingent upon the security of the underlying code, which is susceptible to external threats.


The digital currency landscape is fraught with security challenges, with hackers leveraging a variety of attack vectors to exploit different vulnerabilities. Individual cryptocurrency wallets, particularly hot wallets that maintain a constant connection to the internet, are also vulnerable. Hackers deploy various methods like keylogging, private key harvesting, and phishing to gain unauthorized access. The Atomic Wallet hack in 2023, which resulted in the loss of over $35 million, serves as a stark reminder of the risks associated with personal wallet security.

Smart contracts are not immune to security flaws. These digital agreements are integral to blockchain platforms but can be compromised due to coding errors or oversights. The exploitation of such vulnerabilities is not uncommon, with incidents such as the Solana to Ethereum Wormhole bridge attack resulting in significant financial losses, in this case, nearly $320 million.

Phishing and social engineering tactics are particularly insidious, as they rely on deception to extract sensitive information such as private keys or wallet passwords. In 2023, a sophisticated social engineering attack on an employee at CoinsPaid culminated in the theft of $37 million. These schemes can be highly elaborate, often involving months of planning to successfully execute.

Other sophisticated attacks include Sybil attacks, where numerous pseudonymous identities are created to exert undue influence on a network, and Distributed Denial of Service (DDoS) attacks, which aim to disrupt a network's operations by flooding it with traffic. Solana's network, for instance, was brought down for several hours due to a DDoS attack in 2022.

API security is another critical area, as many exchanges and wallets utilize APIs for various functions. If these are not adequately secured, they can be manipulated by hackers to access user accounts or redirect funds. This vulnerability was exploited in a 2019 incident where hackers used stolen API keys and 2FA codes to perform unauthorized trades on Binance.

To combat these threats, robust security protocols are essential. This includes using advanced security solutions, conducting regular security audits, training employees on security best practices, and implementing systems to continuously monitor transactions for suspicious activity. Additionally, having a well-defined incident response plan and collaborating with cybersecurity experts can enhance a company's preparedness against cyber threats. 

AI + LLM To the Rescue?

A key player in bolstering DeFi security is artificial intelligence, particularly Large Language Models (LLMs). LLMs can automate the development and auditing of smart contracts, identifying vulnerabilities and optimizing performance. This capability reduces human error and enhances the reliability of DeFi protocols. LLMs work by scrutinizing contracts against known vulnerabilities, pointing out potential areas of risk.

One notable application of LLMs is in software testing. Crafting unit tests, an essential yet often neglected part of software quality assurance, is made more efficient with LLMs. However, this tool has its double-edged aspects. While LLMs aid in auditing code, they could also potentially assist hackers in identifying vulnerabilities in open-source crypto projects.

The crypto community combats these risks through a robust culture of white-hat hacking and a bounty system. Cybersecurity professionals emphasize proactive security measures over-reliance on obscurity. AI and LLMs level the playing field by automating the detection of unsafe code, enabling even non-coders to participate in securing smart contracts. Platforms like Rug.AI exemplify how automated assessments can preemptively identify vulnerabilities in new projects.

Perhaps the most revolutionary aspect of LLMs is their capacity to assist in code writing. Users with basic understandings can articulate their requirements in natural language, and LLMs can translate these into functional code. This functionality significantly lowers the entry barrier for creating blockchain applications and encourages diverse innovation within the ecosystem.

It's important to note that the role of LLMs is still evolving. They have proven more effective in refactoring existing code or elucidating code functionalities for beginners rather than in developing entirely new projects. Clear specifications and context are crucial when interacting with these models to avoid the pitfall of "garbage in, garbage out."

LLMs also translate smart contract code into natural language, making it more accessible for those who do not wish to learn coding but want to understand the protocols they utilize.

While LLMs are unlikely to replace high-quality developers in the near future, they offer an additional layer of review and sanity checks. In conclusion, the integration of LLMs into the crypto and DeFi sectors promises to make these realms safer and more accessible, though reliance on them should be tempered with caution due to their current limitations in fully comprehending and predicting the implications of complex code.

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Michael @ CryptoEQ
Michael @ CryptoEQ

I am a Co-Founder and Lead Analyst at CryptoEQ. Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.


Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.

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