Decentralized Finance (DeFi), Strengths Become Weaknesses: a Literature Survey

  • Aziz Perdana Universitas Teknologi Yogyakarta
  • Erik Iman HU Universitas Teknologi Yogyakarta
  • Rianto Universitas Teknologi Yogyakarta
Keywords: Defi, blockchain, security incident, twitter, fintech

Abstract

The use of blockchain technology in Decentralized Finance (DeFi) has gained popularity, with 23 public companies and one country holding bitcoin. DeFi aims to create an open and decentralized financial ecosystem that is accessible to everyone, eliminates intermediaries like financial institutions, and is verifiable, immutable, globally accepted, fast, low-cost, anonymous, and non-custodial. Despite its benefits, the rapid growth of DeFi has led to increased security risks. This study assesses the validity of DeFi's superiority claims in light of security incidents and events in 2022 and Twitter trends. This study used a Systematic Literature Review from various research articles and news from 2022. This research found that DeFi's superiority claims seem to be inconsistent with what is being advertised. It also found that if DeFi is not properly prepared and audited, its strength (Anonymous, open-source, decentralized, non-custodial, eliminates third parties and regulation) may become its weakness. Despite this, users still exhibit high levels of trust and optimism, as seen in the most popular terms shared by user tweets during significant losses, with 301,654 unique tweets between April 30 and May 31, 2022 and 344,519 unique tweets between October 3 and December 3, 2022, that are crypto, nft, and blockchain.

Downloads

Download data is not yet available.

References

coingecko. "Bitcoin Holdings by Public Companies." https://www.coingecko.com/en/public-companies-bitcoin (accessed 17 November, 2022).

AFP. "El Salvador Continues to Bet on Bitcoin Despite its Drastic Fall." https://ticotimes.net/2022/11/18/el-salvador-continues-to-bet-on-bitcoin-despite-its-drastic-fall (accessed December 11, 2022).

D. A. Fernando E. Alvarez, and Diana Van Patten, "Are Cryptocurrencies Currencies? Bitcoin as Legal Tender in El Salvador," 2022.

S. o. t. G. L. R. Directorate, Regulation of Cryptocurrency Around the World: November 2021 Update, 2021.

D. Gogel, DeFi Beyond the Hype The Wharton School of the University of Pennsylvania and World Economic Forum, 2021. [Online]. Available: https://wifpr.wharton.upenn.edu/wp-content/uploads/2021/05/DeFi-Beyond-the-Hype.pdf.

G. M. J. o. V. d. Santos, "MiCA and DeFi (“Proposal for a Regulation on Market in Crypto-assets” and “Decentralised Finance”)," Forthcoming article in "Blockchain and the law: dynamics and dogmatism, current and future", 2021, doi: https://dx.doi.org/10.2139/ssrn.3875355.

D. P. Sam M. Werner, Lewis Gudgeon, Ariah Klages-Mundt, Dominik Harz, William J. Knottenbelt, "SoK: Decentralized Finance (DeFi)," arXiv, 30 April 2021 2021, doi: https://doi.org/10.48550/arXiv.2101.08778.

R. M. Bratspies, "Cryptocurrency and the Myth of the Trustless Transaction," Michigan Telecommunications and Technology Law Review, vol. 25, 2018.

P. Schueffel, "DeFi: Decentralized Finance - An Introduction and Overview," Journal of Innovation Management, vol. 9, 2021, doi: https://doi.org/10.24840/2183-0606_009.003_0001.

G. M. Dimitrios Bakasa, Eun Young Ohb, "What drives volatility in Bitcoin market?," Finance Research Letters, vol. 50, 2022, doi: https://doi.org/10.1016/j.frl.2022.103237.

D. L. Laura Grassi, Alessandro Faes, Filippo Maria Renga, "Do we still need financial intermediation? The case of decentralized finance – DeFi," Qualitative Research in Accounting & Management, vol. 19, no. 3, 2022.

consensys. "Blockchain for Decentralized Finance (DeFi)." https://consensys.net/blockchain-use-cases/decentralized-finance/ (accessed November 20, 2022).

S. J. a. A. P. Douglas J. Cumming, "Regulation of the Crypto-Economy: Managing Risks, Challenges, and Regulatory Uncertainty," Journal of Risk and Financial Management, vol. 12, no. 3, 2019, doi: https://doi.org/10.3390/jrfm12030126.

V. K. Rita Tsepeleva, "Building DeFi Applications Using Cross-Blockchain Interaction on the Wish Swap Platform," presented at the The 21st International Conference on Computational Science and Applications (ICCSA 2021), Cagliari, Italy, 2022.

A. P. Mirko Staderini, Andrea Bondavalli, "Security Evaluation and Improvement of Solidity Smart Contracts," Journal of Systems and Software, 2022, doi: http://dx.doi.org/10.2139/ssrn.4038087.

M. A. Kevin Delmolino, Ahmed Kosba, Andrew Miller, Elaine Shi, "Step by step towards creating a safe smart contract: Lessons and insights from a Cryptocurrency lab," presented at the International Conference on Financial Cryptography and Data Security, 2016.

B. L. Daniel Perez, "Smart Contract Vulnerabilities: Vulnerable Does Not Imply Exploited," in 30th USENIX Security Symposium, 2021: USENIX.

J. H. Mosakheil, "Security Threats Classification in Blockchains," Master of Science in Information Assurance, Department of Information Systems, St. Cloud State University, 2018.

J. B. Wenkai Li, Xiaoqi Li, Xianyi Chen, "Security Analysis of DeFi: Vulnerabilities, Attacks and Advances," presented at the 2022 IEEE International Conference on Blockchain (Blockchain), Espoo, Finland, 22-25 August 2022, 2022.

X. X. Liyi Zhou, Jens Ernstberger, Stefanos Chaliasos, Zhipeng Wang, Ye Wang, Kaihua Qin, Roger Wattenhofer, Dawn Song, Arthur Gervais, "SoK: Decentralized Finance (DeFi) Attacks," arXiv, 20 September 2022 2022, doi: https://doi.org/10.48550/arXiv.2208.13035.

K. Oosthoek, "Flash Crash for Cash: Cyber Threats in Decentralized Finance," ArXiv, 2021, doi: https://doi.org/10.48550/arXiv.2106.10740.

CryptoSec. "Documented Timeline of DeFi Exploits." https://cryptosec.info/defi-hacks/ (accessed 17 November, 2022).

P. K. Ozili, "Decentralized finance research and developments around the world," Journal of Banking and Financial Technology, 2022, doi: http://dx.doi.org/10.1007/s42786-022-00044-x.

L. V. Kiong, DEFI handbook: a comprehensive guide to decentralized finance. 2020.

A. B. a. A. l. R. José Campino, "Initial coin offerings (ICOs): Why do they succeed?," Financial Innovation, vol. 8, 2022, doi: https://doi.org/10.1186/s40854-021-00317-2.

M. W. Yu Xiao, "Guidance on Conducting a Systematic Literature Review," Journal of Planning Education and Research, vol. 39, no. 1, pp. 93-112, 2019.

B. C. Farran Powell. "The Best Crypto Exchanges of November 2022." https://www.forbes.com/advisor/investing/cryptocurrency/best-crypto-exchanges/ (accessed November 20, 2022).

coinmarketcap. "Top Cryptocurrency Spot Exchanges." https://coinmarketcap.com/rankings/exchanges/ (accessed November 20, 2022).

coinpaprika. https://coinpaprika.com/exchanges/bityard/ (accessed February 14, 2023).

D. V.-T. Antonio Briola, Yuanrong Wang, Tomaso Aste, "Anatomy of a Stablecoin’s failure: The Terra-Luna case," Finance Research Letters, vol. 51, no. 2, 2022, doi: http://dx.doi.org/10.1016/j.frl.2022.103358.

Q. W. Shange Fu, Jiangshan Yu, Shiping Chen, "FTX Collapse: A Ponzi Story," arXiv, 2022, doi: https://doi.org/10.48550/arXiv.2212.09436.

A. R. CHOW. "Where Did FTX's Missing $8 Billion Go? Crypto Investigators Offer New Clues." TIME. https://time.com/6243086/ftx-where-did-money-go/ (accessed.

N. Mutual. "Decoding Skyward Finance Smart Contract Vulnerability." https://blog.neptunemutual.com/decoding-skyward-finance-smart-contract-vulnerability/ (accessed November 21, 2022).

V. Chawla. "Solend exploited for $1.26 million in market manipulation attack." https://www.theblock.co/post/182055/solend-exploited-attack (accessed December 11, 2022).

I. s. Buzz. "Moola Loses $9.1 Million After Crypto Heist." https://informationsecuritybuzz.com/moola-loses-9-1-million-after-crypto-heist/ (accessed November 21, 2022).

M. Truppa. "Hacker steals $2.3 million from TempleDAO." https://www.theblock.co/post/176299/hacker-steals-2-3-million-from-templedao (accessed November 21, 2022).

"Crypto Investors Lost $3.5 Billion to Scammers in 2022." https://www.corp-intl.com/news/newsitem.aspx?ID=507 (accessed December 11, 2022).

V. Fabusola. "Cross-Chain Projects to Watch in 2023." https://dailycoin.com/cross-chain-projects-to-watch/ (accessed December 11, 2022).

D. Warren. "Hacker Exploits $21M Vulnerability in Transit Swap." https://cryptosaurus.tech/hacker-exploits-21m-vulnerability-in-transit-swap/ (accessed December 11, 2022).

R. Behnke. "EXPLAINED: THE NEW FREE DAO HACK." https://halborn.com/explained-the-new-free-dao-hack-september-2022/ (accessed November 21, 2022).

S. SINCLAIR. "Avalanche Flash Loan Attack Nets $370K." https://blockworks.co/news/avalanche-flash-loan-attack-nets-370k (accessed December 11, 2022).

"KyberSwap Relieved After $265,000 Hackers Identified With Binance Support." https://www.bsc.news/post/kyberswap-relieved-after-265-000-hackers-identified-with-binance-support (accessed December 11, 2022).

B. NEWAR. "Network and token freeze after Acala exploit raises questions." https://cointelegraph.com/news/network-and-token-freeze-after-acala-exploit-raises-questions (accessed November 21, 2022).

Y. Kim. "30 Crypto Hacks Over $30M, Broken Down." https://chaindebrief.com/30-crypto-hacks-over-30m-broken-down/ (accessed December 11, 2022).

A. SARKAR. "Hacker drains $1.08M from Audius following passing of malicious proposal." https://cointelegraph.com/news/hacker-drains-1-08m-from-audius-following-passing-of-malicious-proposal (accessed November 21, 2022).

C. Deka. "Second Time in 2 Months: DeFi Lender Inverse Finance Drained for $1.6M." https://cryptopotato.com/second-time-in-2-months-defi-lender-inverse-finance-drained-for-1-6m/ (accessed December 11, 2022).

"TERRA (LUNA) COLLAPSES (-100%), VENUS PROTOCOL LOSES $11 MILLION BY RICOCHET." https://www.archyde.com/terra-luna-collapses-100-venus-protocol-loses-11-million-by-ricochet/ (accessed December 11, 2022).

S. Hacked. https://hacked.slowmist.io/ (accessed 8 December, 2022).

O. Adejumo. "DeFi Exploits Continue to Plague Industry as Saddle Finance Hack Sees $10M Stolen." https://beincrypto.com/defi-exploits-continue-to-plague-industry-as-saddle-finance-hack-sees-10m-stolen/ (accessed November 21, 2022).

S. Malwa. "How Deus Finance Was Exploited for $13.4M on Fantom." https://www.coindesk.com/tech/2022/04/28/how-deus-finance-was-exploited-for-134m-on-fantom/ (accessed November 21, 2022).

V. Sopov. "Elephant Money DeFi Hacked, Are Funds SAFU?" https://u.today/elephant-money-defi-hacked-are-funds-safu (accessed November 21, 2022).

Y. K. Chaturvedi. "Starstream Finance Hacked, Around $4M Stolen." https://coincodecap.com/starstream-finance-hacked-around-4m-stolen (accessed November 21, 2022).

K. Cromley. "Hacker Swindles $300K from Cryptocurrency Based Play-to-Earn Mobile Game." https://www.cointrust.com/market-news/hacker-swindles-300k-from-cryptocurrency-based-play-to-earn-mobile-game (accessed December 11, 2022).

"OneRing Finance -After the Hack: A Recap and Solutions." https://medium.com/oneringfinance/onering-finance-exploit-post-mortem-after-oshare-hack-602a529db99b (accessed November 21, 2022).

V. KARUNANIDHI. "Li Finance Loses Over $600,000 as a Hacker Exploits a Bug." https://www.tronweekly.com/li-finance-loses-over-600000/ (accessed December 11, 2022).

Uno.Reinsure. "Umbrella Network Hacked: $700K Lost." https://medium.com/uno-re/umbrella-network-hacked-700k-lost-97285b69e8c7 (accessed November 21, 2022).

S. Malwa. "Fantom-Based Algo Protocol Fantasm Exploited for $2.6M." https://www.coindesk.com/tech/2022/03/10/fantom-based-algo-protocol-fantasm-exploited-for-26m/ (accessed November 21, 2022).

J. Redman. "Attacker Hacks Arbitrum's Treasure DAO for Over 100 NFTs by Leveraging Marketplace Exploit." https://news.bitcoin.com/attacker-hacks-arbitrums-treasure-dao-for-over-100-nfts-by-leveraging-marketplace-exploit/ (accessed November 21, 2022).

C. Deka. "DeFi Project Dego Finance Hacked: Exploiters Reportedly Drain Over $10M." https://cryptopotato.com/defi-project-dego-finance-hacked-exploiters-reportedly-drain-over-10m/ (accessed November 21, 2022).

C. Adams. "Breaking Down the Meter Hack." https://blog.chainsafe.io/breaking-down-the-meter-io-hack-a46a389e7ae4 (accessed November 21, 2022).

C. Cimpanu. "KlaySwap crypto users lose funds after BGP hijack." https://therecord.media/klayswap-crypto-users-lose-funds-after-bgp-hijack/ (accessed November 21, 2022).

S. Malwa. "DeFi Protocol Qubit Finance Exploited for $80M." https://www.coindesk.com/markets/2022/01/28/defi-protocol-qubit-finance-exploited-for-80m/ (accessed November 21, 2022).

C. Duckett. "Crypto.com confirms 483 users hit in attack that saw over $31m in coins withdrawn." https://www.zdnet.com/article/crypto-com-confirms-483-users-hit-in-attack-that-saw-over-31m-in-coins-withdrawn/ (accessed 2 December, 2022).

B. NEWAR. "Animoca Brands’ Lympo NFT platform hacked for $18.7 million." https://cointelegraph.com/news/animoca-brands-lympo-nft-platform-hacked-for-18-7-million (accessed November 21, 2022).

Published
2023-03-28
How to Cite
Aziz Perdana, Erik Iman HU, & Rianto. (2023). Decentralized Finance (DeFi), Strengths Become Weaknesses: a Literature Survey. Jurnal RESTI (Rekayasa Sistem Dan Teknologi Informasi), 7(2), 397 - 404. https://doi.org/10.29207/resti.v7i2.4806
Section
Information Technology Articles