The decentralized finance (DeFi) field continues to evolve, attracting more investors and entrepreneurs. Over the past couple of years, it has proven itself as the fast-growing segment of the cryptocurrency market, which started to catch the attention of cybercriminals. Let's delve into the most frequent types of attacks on the DeFi system in 2023.

DeFi lending and flash loans

The cryptocurrency lending system is enticing due to its model of obtaining loans without intermediaries. In the DeFi environment, smart contracts act as banks or brokers, but luckily their services do not come with a fee. This results in lower interest rates and a quicker loan approval process. The system of instant cryptocurrency loans, known as flash loans, even provides access to crypto assets without collateral, greatly simplifying the loan approval process. Such a user-friendly environment attracts not only honest borrowers but also fraudsters.

The simplest way for a malicious user to profit from flash loans is through price manipulation in speculative market activities. A fraudster can borrow a specific amount of assets, engage in manipulative schemes in the market, and repay the loan within a single transaction. The funds obtained through speculative means constitute the fraudster's "catch."

In the spring of 2023, this scheme was employed to target the 0VIX protocol on the Polygon (MATIC) blockchain and the Jimbos Protocol.

Front running

This is a strategy in which a trader monitors the emergence of particularly large transactions in the market and races ahead of them by inserting their own trade and gaining priority in execution. The first transaction will be executed with a higher fee.

By front running, the scammers manage to buy the cryptocurrency at a lower price and sell it at a higher one when the large transaction goes through. In this scenario, they are the only ones who profit, while other market participants incur significant losses. The scheme works as follows:

• trader places a large order to buy cryptocurrency;
• frontrunner monitors the network and detects this order;
• frontrunner adds gas to his transaction and receives priority in execution;
• due to a large order of a trader, the price of the cryptocurrency begins to rise;
• frontrunner receives cryptocurrency at a lower price;

To implement the front running strategy, hackers develop bots that continuously monitor the market. Unfair manipulative schemes are also often used to learn insider information about upcoming large orders.

Thus, an unscrupulous trader can make a profit by buying assets at a low price immediately before executing a large order, and then selling crypto at an increased cost.

In April, similar actions of a fraudulent validator in Ethereum (ETH) block caused losses totaling ~$25.4 million.

Oracle hacking

Information about cryptocurrency prices is sourced into DeFi protocols from external sources known as oracles. Scammers can hack these oracles and manipulate the data, deceiving trading platforms. All of this leads to substantial losses for ordinary users and significant gains for fraudsters.

In July of this year, the Conic Finance protocol fell victim to a hack. The hackers managed to withdraw 1700 ETH, which was approximately $3.26 million at that time.

Blockchain bridges hacks

Crypto assets can move from one blockchain to another through bridges. At this moment, they are more vulnerable to a hacker attack than when stored in a crypto wallet on the exchange or during internal transfers.

Hackers often take advantage of inconsistencies between networks to gain access to someone else's tokens. According to security reports, in 2022 the damage caused by hacks of blockchain bridges is about $ 1.9 million. In total, 12 hacker bridge hacks were carried out in a year, according to Beosin.

Scam projects

This trend of defrauding new investors has moved into the DeFi space from the traditional economic system. Scamming projects have long been created on classic exchanges – they make false promises to their investors, ultimately leaving them without their own funds.

In the crypto industry, scam projects often create the appearance of a promising project, in order to attract users, and then collapse and disappear with all investments. The investors are left with depreciated tokens or fake stablecoins.

This type of scam is one of the most common ones in the world. In August of this year alone, $460,000 of client deposits were reported stolen from the fraudulent SwirlLend protocol. The project team deleted all their data from social networks, transferred funds to another blockchain and disappeared.

Conclusion

The DeFi sector stands as a beacon of innovation and opportunity in the world of decentralized finance. However, as this article has revealed, it still has its own vulnerabilities. Hacker attacks within DeFi, whether through flash loans, front running, or oracle manipulation, pose real threats to the ecosystem's integrity and the financial security of its users.

The rapid evolution of both DeFi projects and cybercriminal tactics underscores the importance of proactive defense measures. Developers, traders, and investors alike must remain vigilant, continuously adapting and improving security protocols to safeguard their assets and the DeFi ecosystem as a whole. While the DeFi landscape may be imperfect and susceptible to exploitation, the commitment of its community to enhancing security is unwavering.

If you want to learn more interesting facts about crypto then check out our blog! You might like our articles “5 Main Risks of a Crypto Wallet” and “Top 5 Crypto Trading Strategies”.

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SimpleSwap reminds you that this article is provided for informational purposes only and does not provide investment advice. All purchases and cryptocurrency investments are your own responsibility.