The decentralised finance (DeFi) sector reshapes the frontiers of technological advancement as it provides finance services with no need for intermediaries, borders or banks.
However, as the industry progresses and more and more DeFi businesses including the likes of crypto and IDO launchpads in the Web3 space as well as various others are born and grown, it becomes clear that one of the most critical weaknesses concerns is security.
There is a significant difference between the structure of large financial firms and the DeFi sector. While large financial firms are equipped with numerous legal and cybersecurity departments, the DeFi sector is often solely composed of small groups of a few developers and product managers.
Every DeFi project is made of several parts that are at risk of being attacked. In addition to smart contracts, there are graphical user interfaces oracles and social networks that serve as the front end to the web apps. As with any emerging technology, DeFi faces some important and persistent security challenges:
Smart contracts under the DeFi framework have an ever-changing list of vulnerabilities, ranging from over and underflow to the presence of improper access controls.
Admin key abuse continues to pose one of the gravest threats in DeFi. These keys control smart contracts and treasury functions in a manner that a single compromised key or a malicious actor with access, can drain funds, shut down contracts or alter protocol behaviour. In the absence of multi-signature setups or governance limits, these keys represent a single point of catastrophic failure.
As web interfaces are the primary means of interacting with DeFi projects, front-end attacks are also important to monitor. If the front end is compromised, the user could be redirected to a malicious wallet or phishing site without the need to change the underlying smart contract.
These attacks exploit trust and brand familiarity, which it cannot be overemphasised that the need to protect and routinely check your website code is crucial.
In DeFi protocols, oracles are used to relay external information, such as the price of an asset. If an oracle is susceptible to manipulation or is of poor quality, an attacker could falsify inputs to execute arbitrage, drain liquidity pools or trick protocols to act inappropriately.
Good DeFi design should employ decentralised oracle networks and provide autonomous shut down mechanisms that restrict the damage of bad or manipulated data.
There are some simple-to-implement steps that your small DeFi project can take to ensure better security:
Security must be prioritised from the very beginning. In the case of smart contracts, this requires a rigorous consideration of logic, boundaries and known vulnerabilities. Conducting peer reviews, avoiding short cuts and abiding by established best practices are paramount. While proactive design helps avert crises and saves resources later, insufficient attention to defense strategies during the design stage guarantees struggling to contain an endless flow of issues at later stages.
The potential of adding new vulnerabilities is minimised when established open source frameworks and libraries are utilised. Many of these tools have a proven reputation and have gone through numerous reviews from large communities.
Skimping on audits, regardless of team size, is a common misconception. Every project, regardless of its size, has the potential to manage huge amounts of funds, making them a target to hackers. Professional audits are essential to every project, as it spots the security gaps no matter the estimated size of the codebase. Therefore, even partial audits are a necessity.
Internal audits, community assessments and peer reviews are useful. Outlining what has and has not been audited increases transparency, enabling users to make informed decisions while demonstrating that the team is acting in good faith.
Neglecting the proper storage and management of admin keys for smaller DeFi projects could result in catastrophic risks for the entire project. Any shared private key could end up harming the entire system.
To control risks, teams could also implement timelocks and gradual governance transitions.
Social engineering is one of the most dangerous and underestimated threats in the DeFi space, especially for small teams. These forms of phishing, impersonation and other sorts of manipulation frequently target the most trusted people in the organisation: founders, developers or admins. These threats are not that easy to identify; they often come as convincing messages, fake accounts or disguised links.
Teams should be trained to identify suspicious interactions and to verify the identities of the people they are interacting with, especially on Discord, Telegram or over email.
Team members should be instructed to never, under any circumstances, divulge sensitive information such as seed phrases or private keys and must not click on or respond to requests unless they are verified through trusted and secure channels.
Since the front end is the main access point for users, it is usually the most vulnerable and easiest for attackers to target. For the backend domain, appropriate measures must be taken to ensure the website and web applications are securely hosted without vulnerable dependencies, domain hijacking and other web application vulnerabilities. In order to ensure user trust and avert exploits, HTTPS must be implemented, monitored for DNS changes and frontend integrity checks must be utilised as safeguards.
Security breaches can happen even if you try your best to prevent them. Not having any sort of plan when an incident occurs can significantly increase the amount of damage to your company. Having a well-defined incident response plan reduces the response time of your team, enables you to mitigate damage and enhances communication with your users.
The plan must outline specific procedures for user notification and instant response actions. If your contracts are upgradable then you need to have a dependable system for implementing emergency hotfixes. In some scenarios, you may have to suspend contracts or stop providing liquidity to contain an exploit.
If the incident has regulatory concerns, legal support is critical. Also, monitor social platforms such as Discord and Twitter for impersonation accounts.
