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The decentralized finance (DeFi) industry has lost over a billion dollars to hackers in the past couple of months, and the situation seems to be spiraling out of control.
According to the latest statistics, approximately $1.6 billion in cryptocurrencies was stolen from DeFi platforms in the first quarter of 2022. Furthermore, over 90% of all pilfered crypto is from hacked DeFi protocols.
These figures highlight a dire situation that is likely to persist over the long term if ignored.
In recent years, hackers have ramped up operations targeting DeFi systems. One primary reason as to why these groups are drawn to the sector is the sheer amount of funds that decentralized finance platforms hold. Top DeFi platforms process billions of dollars in transactions each month. As such, the rewards are high for hackers who are able to carry out successful attacks.
The fact that most DeFi protocol codes are open source also makes them even more prone to cybersecurity threats.
This is because open source programs are available for scrutiny by the public and can be audited by anyone with an internet connection. As such, they are easily scoured for exploits. This inherent property allows hackers to analyze DeFi applications for integrity issues and plan heists in advance.
Some DeFi developers have also contributed to the situation by deliberately disregarding platform security audit reports published by certified cybersecurity firms. Some development teams also launch DeFi projects without subjecting them to extensive security analysis. This increases the probability of coding defects.
Another dent in the armor when it comes to DeFi security is the interconnectivity of ecosystems. DeFi platforms are typically interconnected using cross-bridges, which bolster convenience and versatility.
While cross-bridges provide enhanced user experience, these crucial snippets of code connect huge networks of distributed ledgers with varying levels of security. This multiplex configuration allows DeFi hackers to harness the capabilities of multiple platforms to amplify attacks on certain platforms. It also allows them to quickly transfer ill-gotten funds across multiple decentralized networks seamlessly.
Besides the aforementioned risks, DeFi platforms are also prone to insider sabotage.
Hackers are using a wide range of techniques to infiltrate vulnerable DeFi perimeter systems.
Security breaches are a common occurrence in the DeFi sector. According to the 2022 Chainalysis report, approximately 35% of all stolen crypto in the past two years is attributed to security breaches.
Many of them occur due to faulty code. Hackers usually dedicate significant resources to finding systemic coding errors that allow them to carry out these types of attacks and typically utilize advanced bug tracker tools to aid them in this.
Another common tactic used by threat actors to seek out vulnerable platforms is tracking down networks with unpatched security issues that have already been exposed but yet to be implemented.
Hackers behind the recent Wormhole DeFi hack attack that led to the loss of about $325 million in digital tokens are reported to have used this strategy. An analysis of code commits revealed that a vulnerability patch uploaded to the platform’s GitHub repository was exploited before the patch was deployed.
The mistake enabled the intruders to forge a system signature that allowed the minting of 120,000 Wrapped Ether (wETH) coins valued at $325 million. The hackers then sold the wETH for about $250 million in Ether (ETH). The exchanged Ethereum coins were derived from the platform’s settlement reserves, thereby leading to losses.
The Wormhole service acts as a bridge between chains. It allows users to spend deposited cryptocurrencies in wrapped tokens across chains. This is accomplished by minting Wormhole-wrapped tokens, which alleviate the need to swap or convert the deposited coins directly.
Flash loans are unsecured DeFi loans that require no credit checks. They enable investors and traders to borrow funds instantly.
Because of their convenience, flash loans are usually used to take advantage of arbitrage opportunities in connected DeFi ecosystems.
In flash loan attacks, lending protocols are targeted and compromised using price manipulation techniques that create artificial price discrepancies. This allows bad actors to buy assets at hugely discounted rates. Most flash loan attacks take minutes and sometimes seconds to execute and involve several interlinked DeFi protocols.
One way through which attackers manipulate asset prices is by targeting assailable price oracles. DeFi price oracles, for example, draw their rates from external sources such as reputable exchanges and trade sites. Hackers can, for example, manipulate the source sites to trick oracles into momentarily dropping the value of targeted asset rates so that they trade at lower prices compared to the wider market.
Attackers then buy the assets at deflated rates and quickly sell them at their floating exchange rate. Using leveraged tokens obtained through flash loans allows them to magnify the profits.
Besides manipulating prices, some attackers have been able to carry out flash loan attacks by hijacking DeFi voting processes. Most recently, Beanstalk DeFi incurred a $182 million loss after an attacker took advantage of a shortcoming in its governance system.
The Beanstalk development team had included a governance mechanism that allowed participants to vote for platform changes as a core functionality. This setup is popular in the DeFi industry because it upholds democracy. Voting rights on the platform were set to be proportional to the value of native tokens held.
An analysis of the breach revealed that the attackers obtained a flash loan from the Aave DeFi protocol to get almost $1 billion in assets. This enabled them to get a 67% majority in the voting governance system and allowed them to unilaterally approve the transfer of assets to their address. The perpetrators made off with about $80 million in digital currencies after repaying the flash loan and related surcharges.
Approximately $360 million worth of crypto coins was stolen from DeFi platforms in 2021 using flash loans, according to Chainalysis.
For a long time now, hackers have used centralized exchanges to launder stolen funds, but cybercriminals are beginning to ditch them for DeFi platforms. In 2021, cybercriminals sent about 17% of all illicit crypto to DeFi networks, which is a significant jump from 2% in 2020.
Market pundits theorize that the shift to DeFi protocols is because of the wider implementation of more stringent Know Your Customer (KYC) and Anti-Money Laundering (AML) processes. The procedures compromise the anonymity sought after by cybercriminals. Most DeFi platforms forego these crucial processes.
Centralized exchanges are also, now more than ever before, working with authorities to counter cybercrime. In April, the Binance exchange played an instrumental role in the recovery of $5.8 million in stolen cryptocurrencies that was part of a $625 million stash stolen from Axie Infinity. The money had initially been sent to Tornado Cash.
Tornado Cash is a token anonymization service that obfuscates the origin of funds by fragmenting on-chain links that are used to trace transacting addresses.
A portion of the stolen funds was, however, tracked by blockchain analytic firms to Binance. The loot was held in 86 addresses on the exchange.
In the aftermath of the incident, a spokesperson for the United States Treasury Department underlined that crypto exchanges that handle money from blacklisted crypto address risk sanctions.
Tornado Cash also seems to be cooperating with the authorities to stop the transfer of stolen funds to its network. The company has said that it will be implementing a monitoring tool to help identify and block embargoed wallets.
There seems to be some progress in the seizure of nicked assets by the authorities. Earlier this year, the U.S. Department of Justice announced the seizure of $3.6 billion in crypto and arrested two people who were involved in laundering the funds. The money was part of the $4.5 billion purloined from the Bitfinex crypto exchange in 2016.
The crypto seizure was among the biggest ever recorded.
Speaking exclusively to Cointelegraph earlier this week, Eric Chen, CEO and co-founder of Injective Labs — an interoperable smart contracts platform optimized for decentralized finance applications — said that there is hope that the problems will subside.
“We are seeing the tide continuing to subside, as more robust security standards are put into place. With proper testing and further security infrastructures put into place, DeFi projects will be able to prevent common exploit risks in the future,” he said.
On the measures that his network was taking to avert hack attacks, Chen provided an outline:
“Injective ensures a more tightly defined application-centric security model compared to traditional Ethereum Virtual Machine-based DeFi applications. The design of the blockchain and the logic of core modules protect Injective from common exploits such as re-entrancy, maximum extractable value and flash loans. Applications built on top of Injective are able to benefit from the security measures that are implemented in the blockchain on the consensus level.”
Cointelegraph also had the chance to speak with Konstantin Boyko-Romanovsky, CEO and founder of Allnodes — a non-custodial hosting and staking platform — about the increase in hack incidences. Regarding the main catalysts behind the trend, he said:
“No doubt it will take some time to lower the risk of DeFi hacks. It is unlikely, however, that it will happen overnight. There is a lingering sense of a race in DeFi. Everyone seems to be in a hurry, including the project founders. The market is evolving faster than the speed at which programmers write code. Good players who take every precaution are in the minority.”
He also provided some insight on procedures that would help counteract the problem:
“The code must get better and smart contracts must be thoroughly audited, that’s for sure. In addition, users should be constantly reminded of cautious etiquette online. Identifying any flaws can be attractively incentivized. This, in turn, might promote healthier conduct across a particular protocol.”
The DeFi industry is having a hard time thwarting hack attacks. There is, however, hope that increased monitoring from the authorities and greater cooperation among exchanges will help curb the scourge.
B3, the Brazilian Stock Exchange, confirmed that within six months it intends to launch its first official product aimed at the cryptocurrency market — Bitcoin (BTC) futures trading. The group’s chief financial officer, André Milanez, made the announcement during a conference call on Monday.
Milanez did not provide many details on how the product will work. It is not yet known if B3 will form a partnership or if it will offer Bitcoin futures trading directly, but the timeline for launching this product was stated to be relatively short. “We plan to launch bitcoin futures in the next three to six months,” he said.
Currently, in Brazil, institutional and retail investors can trade 11 ETFs through B3 with exposure to cryptocurrencies, including CRPT11 from Empiricus with Vitreo; the NFTS11 of Investo; QBTC11, QETH11 and QDFI11 all from QR Assets and META11, HASH11, BITH11, ETHE11, DEFI11, WEB311 all from Hashdex. In addition, in Brazil, there are more than 25 investment funds approved by the Securities and Exchange Commission (CVM) that offer different types of exposure to the crypto-assets market.
In January Jochen Mielke de Lima, director of information technology at B3, had already said that the Brazilian stock exchange would launch several products with exposure to cryptocurrencies in 2022, including Bitcoin futures and Ethereum (ETH) futures
At the time, the executive highlighted that the Brazilian stock exchange had been looking closely at the cryptocurrency market from a technological point of view since 2016.
According to the statement, B3 only needed to settle the question on whether the negotiations would be carried out against the U.S. dollar or against the Brazilian real. Futures contracts need a reference index, so if the team chooses Brazil’s native currency, it will be necessary to compose a crypto-assets index in reais — something that does not exist now.
The B3 rep also said it is exploring ways to provide data inputs for the country’s central bank digital currency, or CBDC.
In addition to BTC and ETH futures, B3 also intends to offer services to national cryptocurrency exchanges and to be a kind of “centralizer” of custody and settlement operations, according to Jochen Mielke de Lima:
“We have around 30 national crypto exchanges, apart from the international ones that operate here. We could offer a service to facilitate and standardize their operations. I believe it has something to explore in providing custody services and in the settlement process.”
Mielke, also stated that the cryptocurrency market is very similar to the regulated stock market, as it involves issuing, trading, settlement and custody. He stated therefore that B3 could help solve common problems between exchanges.
“We are identifying points of friction that we can help resolve to face up, such as helping our customers provide the best access to their end customers,” he said.
In addition, B3 plans other products based on cryptocurrencies and blockchain to launch in 2022. Among them, there are studies on a platform for asset tokenization, cryptocurrency trading, cryptocurrency custody, among others.
“Trading and access to liquidity centers: this means mitigating the complexities of accessing a fragmented, global and 24×7 market; Digital Asset Custody: providing reliable custody (hence, purpose of blockchain transactions); Over-the-counter facilitation: thIn this way, it wants to provide more security and efficiency in the movement and DVP of digital assets; Capital efficiency gains: thus, it wants to mitigate the pre-funded nature of operations and Crypto as a service: make it easier for clients to explore the crypto market with low friction,” highlighted B3.
For 2022, B3 reps said they foresee the official launch of a reinsurance platform. This will work on the Corda blockchain R3, and is a partnership between the exchange and IRB Brazil.
Gaming giant Square Enix has revealed in its Q1 earnings report that it will expand nonfungible tokens (NFT) into more game products as part of its medium-term business strategy in 2022.
Square Enix (SE) is a Japanese game developer with $3 billion in assets under management according to its latest earnings report. The firm owns the Final Fantasy property and sold the Tomb Raider franchise for $300 million on May 3.
The report states that the firm piloted NFTs on the Shi-San-Sei Million Arthur game starting in February this year. The success of the pilot program will lead to the second season of the game’s NFTs and will ultimately see the firm pursue broader activities in the NFT and blockchain industries.
Among the top priorities of its blockchain domain initiatives, SE plans on establishing regulatory clarity and guidelines for blockchain games, tackling scalability in NFT economies, and considering founding a corporate capital venture unit.
The firm also stated that it plans on establishing an overseas entity that will handle “issuing, managing, and investing our own tokens,” suggesting the firm will begin creating an expansive gamingtoken economy.
SE has been working with Web3 gaming and Metaverse venture capital firm Animoca Brands to explore its options in the blockchain gaming space. Cooperation between the two firms is expected to grow as SE delves further into the ecosystem.
Animoca’s Executive Chairman Yat Siu believes Square Enix’s influence in gaming will only help the firm form a foothold in blockchain gaming. He told Cointelegraph today:
“Square Enix has already been talking about the potential of blockchain games for a long time so they get it better than most of the traditional gaming giants out there.”
The report puts investments in and monetization of blockchain, artificial intelligence (AI), and cloud computing as its third objective in its medium-term business strategy. This is in line with CEO Yosuke Matsuda’s expressed intention for his company to become more involved in those technologies in January.
The popularity of Web3 and NFT gaming has remained robust throughout 2022 despite a general crypto market downturn. Market tracker DappRader shows that there were 1 million daily active gamers on May 14, nearly the same level as on January 1.
However, gamers are not buying as much as they used to as total sales volume for NFT game items has dropped 88% from $70 on January 1 to $8.7 million on May 14.
The Metaverse has many advantages for kids, especially from an education perspective.
With the help of such technology, learners can grasp abstract concepts easily in a more engaging way. The Metaverse also offers almost actual, hands-on experience that can be very beneficial for children and help them to better understand the world around them and how things work.
In addition, the Metaverse can improve social skills in children. Social media has often been blamed for the rise in loneliness and depression among kids. On the other hand, the Metaverse has the potential to provide a safe and controlled environment for kids to interact with their peers and make new friends. Furthermore, it has the potential to encourage creativity and develop social intelligence in kids.
Lastly, it’s fun. It can be a great way for parents to bond with their kids and teach them various skills and knowledge in a less stressful environment. As long as parents are aware of the potential dangers and take the necessary measures to keep their kids safe, the Metaverse can be a great place for kids to explore and learn.
The Metaverse also poses some potential risks for children such as cyberbullying and a lack of privacy.
Cyberbullying is a serious concern, as kids can be targeted and harassed by anonymous users. In addition, there is also the risk of children being exposed to inappropriate content, such as violence, sexual content and hate speech.
Moreover, some experts are also concerned that the Metaverse can be addictive for kids. Given its highly immersive and engaging nature, it could be difficult for kids to manage their time and limit their use of the Metaverse.
Privacy may yet be another issue on the Metaverse. And, when kids are concerned, it’s even more important to be aware of such risks. As kids use the Metaverse, they may inadvertently share personal information such as their home address or other personal details.
In addition to the physiological risks, the physical risks of the Metaverse are also something to consider. Heavy use of VR headsets may lead to symptoms like dizziness, nausea and headaches. And, while these effects are usually temporary, they can still be quite discomforting.
Lastly, access inequality is a major concern when it comes to the Metaverse. Not every child will have access to the internet or a VR headset. And, without such access, they may be at a disadvantage, both educationally and socially.
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