DeFi is currently on the brink of amazing growth in the crypto space, but flashloan attacks are still a great impediment. In the first half of 2021 alone, many DeFi systems suffered flash loan attacks and lost millions of dollars in the process.
In May, Binance Smart Chain projects lost $167 million, according to a report by Rekt. Also, the bEarn DeFi protocol lost $11 million to a flash loan attack within the same period. The Synthetic Protocol, a liquidity platform designed for synthetic assets, was also a victim of flash loan attacks and lost $30 million.
Before people can access loans on DeFi platforms, liquidity providers (LPs) “invest/stake” tokens for which they are paid commission. For the PancakeSwap platform, LPs revive 0.15% commission from trading fees. On the other hand, OrionSwap pays liquidity providers as high as 0.165% commission.
On the Binance Smart Chain, OrionSwap’s 0.18% fee is the lowest. Mostly, these DeFi platforms are better suited for those moving large sums due to the trading fees attached to these transactions. A DeFi protocol with better scalability will certainly go a long way in mitigating high trading and gas fees.
These rising flashloan attacks in DeFi have cast a great shadow of doubt on the future of decentralized finance and its ability to protect investors and users alike. Therefore, DeFi projects must look inwards to solve the problem before it further degenerates.
What are Flashloans, and how do hackers exploit them?
Flash loans are a special kind of loan only available on DeFi protocols. It allows users to borrow unlimited amounts of capital from the DeFi system without collateral, and there are no credit checks. The two major uses of flashloans are arbitrage and liquidations.
Arbitrage allows users to earn profits by exploiting price differences between two exchanges. For instance, if the price of Cake on PancakeSwap is $40 and $35 on OrionSwap, a user can leverage a flash loan to buy 100 Cake from OrionSwap for $3500. The user then resells the same assets for $40 on PancakeSwap for $4000, repays back the loan, and makes a profit of $500.
However, malicious actors have found a way to exploit this process in combination with other gimmickry actions to manipulate DeFi platforms in their favor.
Elimination of Flashloans
OrionSwap is a DeFi platform that has eliminated flashloans from its protocol. The team believes these attacks will become less frequent if flash loans are no longer available. . Their approach has raised a level of controversy within the DeFi space since flashloans are needed for arbitrage and liquidations.
However, OrionSwap maintained that the disadvantages of flash loans far outweigh the benefits. While removing flash loans from OrionSwap doesn’t completely solve the problem for DeFi, the team hopes that it will cause other projects to follow their example. As for arbitrage and liquidations, the team stands behind the idea that there are likely more effective mechanisms to allow for those use cases that don’t allow such widespread damage.
Educating the crypto community about Flashloans
The information gap in the DeFi space is one of the major reasons flash loan attacks have been on the rise. The community needs to be constantly educated and guided on the best line of action in such cases. The Orionswap DeFi platform is also creating a program for educating the DeFi community and providing them with access to the right information. They leverage this program to teach people about yield farming, the risks that come with it, and how to mitigate these risks.
Create a self-sustaining DeFi community
The importance of having a self-sustaining DeFi community is that they will be more active in ensuring the success and safety of the ecosystem. Orionswap is also applying this approach to how they provide the initial liquidity for their platform token, Starfield.. Upon the launch of its Starfield token, the OrionSwap team did not lock any liquidity.
This was on purpose to empower the users to create the liquidity necessary for the farm to launch. This requires the users to farm their own Starfield rewards and use those rewards to establish the liquidity for Starfield. However, this means the users get the lionshare of the profits when the Starfields rise in value. If the liquidity was locked by the dev team, no one would benefit from the increase in Starfield value.
DeFi projects must rise to the occasion and seek lasting solutions to the rising flash loan attacks. Although the solutions highlighted are effective, the DeFi space is still young, and new vulnerabilities will likely be exposed every now and then. Therefore, developers must do everything to fortify their systems and make it difficult for hackers to exploit.
Published August 3rd, 2021