Wednesday, 22 September 2021

The $610 million DeFi heist that wasn’t

5 min read

By Foo Boon Ping

Despite losing over $610 million worth of cryptocurrencies to a cyber hack, touted as the largest of its kind, Poly Network was able to recover all assets shortly after. What does the increasing number of cyber thefts, and this particular case, say about the security of decentralised finance?

 The explosive growth in cryptocurrency and digital token investment has seen the value of this new asset class reach record highs. According to crypto market reference data provider, CoinMarketCap, the average total capitalisation of all cryptoassets, including stablecoins and tokens, hit $1.6 trillion in August 2021, breaching the $2 trillion mark for the first time earlier in April. 

 

Besides professional and institutional investors, cryptocurrency adoption has also surged among more grassroots users. Retail consumers concerned about the economic fallout of the pandemic, skyrocketing inflation and local currency depreciation, have resorted to cryptocurrencies for peer-to-peer transfers and savings. 

Global cyrpto adoption spiked

Blockchain analytic firm Chainalysis reported that global crypto adoption grew by over 881% in 2020, especially in Asia. Vietnam and India ranked first and second while Thailand, China and the Philippines were among the top 15 adopter nations. The increase in adoption was driven apparently by the growth of decentralise finance (DeFi) in these markets. DeFi as the name suggests is a self-regulating decentralised form of finance that does not rely on traditional centralised financial intermediaries such as brokerages, exchanges, or banks but instead utilises smart contract protocols on blockchains to enable direct, open and public peer-to-peer transactions. Ultimately, the success of DeFi rests on the use of distributed ledger technology to provide a high level of transactional transparency and security that replicates, or supersedes the trusted platforms that centralised intermediaries were created to facilitate.  

Hacks and fraudulent activities increased 

Unsurprisingly, increased cryptocurrency and DeFi adoption has also given rise to a growth in related hacks and fraud. Crypto intelligence provider CipherTrace disclosed that while DeFi accounted for over 36% of Ethereum’s total market capitalisation in April 2021, it contributed to over 70% of all of 2021’s major hacks and fraud. The company found that attacks on DeFi made up more than 60% of the major hack and theft volume as of April 2021. It revealed that a total of $474 million were stolen from DeFi from January to July 2021, far exceeding the $129 million lost to hackers for the whole of 2020. 

Notwithstanding the dramatic jump, the amount was soon to be dwarfed when hackers struck on 10 August and made off with over $610 million in cryptocurrencies from Poly Network, a DeFi platform that connects different blockchains to swap digital assets. However, within a day of the theft, the apparent hacker, “Mr. White Hat” had returned about half of the stolen assets. And by 23 August all assets were returned, and Poly Network even thanked the hacker in its public blog for cooperating in the asset recovery process. 

The Poly Network hack and the successful asset recovery that followed demonstrate the challenges that hackers face in carrying out such a DeFi heist, reportedly the largest in history. One that was practically surveilled by the entire decentralised community. However, it also shows that the burgeoning DeFi ecosystem continues to be vulnerable to hacks. According to Chainalysis, cryptocurrency theft is more difficult to carry out than stealing fiat funds due in part to the inherent transparency of blockchains. Transactions made on public blockchains can literally be viewed by anyone in the world. It becomes impossible to move or even hide assets without somebody finding out and disclosing it. The transparency and immutability of transactions and traceability of assets are not confined to only cryptocurrencies but any form of digital assets, essentially data. Therein lies its potential and appeal, especially to secure commercial transactions and financial assets.  



Keywords: Blockchain, Cryptocurrency, Decentralise Finance, Distributed Ledger Technology
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