A new Ethereum request for comment (ERC) has been published on Github that proposes a standard for a DeFi “circuit breaker.” The developer of the proposal, Diyahir Campos, believes that this could have prevented billions of dollars worth of crypto being stolen from DeFi protocols in 2022.
What is a DeFi circuit breaker?
A DeFi circuit breaker is a smart contract that can be used to halt suspicious activity on a DeFi protocol. This could include large withdrawals of tokens, or changes to the protocol’s code. The circuit breaker would give the protocol’s developers time to investigate the activity and take action, such as blocking the withdrawals or reverting the changes to the code.
How could a DeFi circuit breaker have prevented hacks?
In many cases, DeFi hacks have been caused by malicious actors exploiting vulnerabilities in the protocol’s code. If a circuit breaker had been in place, it could have halted the withdrawals of tokens as soon as the vulnerability was exploited, preventing the hackers from stealing any funds.
How effective could a DeFi circuit breaker be?
Campos estimates that a DeFi circuit breaker could have prevented up to 70% of the hacks that occurred in 2022. This is based on the assumption that the circuit breaker would have been able to halt the withdrawals of tokens in the early stages of the hack, before the hackers had been able to steal a significant amount of funds.
What are the challenges of implementing a DeFi circuit breaker?
There are a number of challenges that need to be addressed before a DeFi circuit breaker can be implemented. One challenge is that the circuit breaker needs to be able to distinguish between legitimate activity and malicious activity. This is a difficult task, as there is a fine line between what is considered suspicious and what is considered normal.
Another challenge is that the circuit breaker needs to be implemented in a way that does not compromise the security of the DeFi protocol. If the circuit breaker is not implemented correctly, it could be exploited by malicious actors to steal funds.
Conclusion
A DeFi circuit breaker is a promising technology that could help to prevent hacks in the DeFi space. However, there are a number of challenges that need to be addressed before a circuit breaker can be implemented. If these challenges can be overcome, a DeFi circuit breaker could have a significant impact on the security of DeFi protocols.
Additional Information
The ERC-7265 proposal is still in the early stages of development. It is not yet clear when, or if, it will be implemented.
There are a number of other projects that are working on DeFi security solutions. These include Chainlink’s Keepers, and Certora’s Assured Contracts.
The DeFi space is still relatively new, and there is a lot of learning that needs to be done about how to secure these protocols. A DeFi circuit breaker is one potential solution, but it is not the only one.
