Safeguarding DeFi Platforms: Real-Time Fraud Prevention

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2022 was a bad year for DeFi Security. 82% of all cryptocurrency assets stolen last year were stolen from DeFi platforms, totalling over $3.1 billion.

The rapid growth of DeFi over the past few years has attracted the attention of hackers, who are always on the lookout for vulnerabilities to exploit. As a blockchain security firm specializing in Real-time Fraud Prevention, Smart Contract Audits, and Web3 Penetration Testing, HYDN understands the risks DeFi platforms face and offers comprehensive solutions to keep them secure.

In this article, we will explore five common types of attacks targeting DeFi platforms, explain why they pose significant risks, and discuss how HYDN Prevent, our real-time fraud prevention product, can help protect your DeFi platform from these threats.

The Big Five: Common Attacks on DeFi Platforms

Smart Contract Vulnerabilities

Smart contracts are the lifeblood of DeFi platforms, but poorly written contracts can be a treasure trove for hackers. Reentrancy attacks, integer overflows, and front-running attacks are just a few examples of vulnerabilities that can be exploited, resulting in drained funds or destabilized platforms. Even well written code which has been audited can still turn up vulnerabilities that were missed by an audit firm, so just relying on audits isn’t enough. 

Oracle Manipulation

However, it's essential to recognize that not all attacks on DeFi platforms fit the mold of traditional hacking. In some instances, malicious actors have managed to drain funds from DeFi protocols without exploiting a flaw in the platform's code. Instead, they manipulate the price oracles that DeFi platforms rely on to accurately price assets in line with the broader cryptocurrency market. We'll refer to these unique incidents as oracle manipulation attacks.

Oracle manipulation attacks are typically executed by bad actors who leverage substantial amounts of cryptocurrency to rapidly increase the trading volume of low-liquidity tokens on the targeted DeFi platform. This tactic can lead to swift and significant price surges that don't accurately reflect the wider market. Interestingly, attackers often obtain the initial funds for such attacks through flash loans if they don't have the necessary capital readily available. Once they've driven up the asset's price, they can exchange their artificially inflated holdings for more liquid tokens with stable values or use the overvalued tokens as collateral to borrow other assets, with no intention of repaying the loan.

This type of attack can result in significant losses or even the collapse of the entire platform. Chainalysis estimated that in 2022, DeFi protocols lost $403.2 million in 41 separate oracle manipulation attacks.

Phishing and Social Engineering Attacks

Phishing remains a tried and tested method for hackers, who use deceptive tactics to coax users into revealing sensitive information. This data can then be used to access and steal funds from the victim's wallet or DeFi account.

In a phishing attack, a malicious actor creates a fake website or app that looks similar to a legitimate DeFi platform, and then tricks users into providing their login credentials or other sensitive information. Once the attacker has access to a user's account, they can transfer funds out of the account, or perform other malicious actions that can result in financial losses for the user.

Sybil Attacks

Sybil attacks are dangerous for DeFi platforms because they allow an attacker to create multiple fake identities and use them to manipulate the system. In a Sybil attack, an attacker can create a large number of fake user accounts, which can be used to launch various types of attacks, including spamming the network, manipulating voting systems, and launching various types of financial attacks, such as flash loans and liquidity draining attacks.

In a DeFi context, Sybil attacks can be particularly damaging as they can be used to manipulate voting systems in governance protocols, which can allow the attacker to take control of the protocol and make decisions that benefit them at the expense of other users. Sybil attacks can also be used to manipulate the price of tokens and assets by creating artificial demand, which can lead to price manipulation and financial losses for legitimate investors.

Flash Loan Attacks

Flash loans have become increasingly popular in DeFi. These loans allow users to borrow funds without any collateral, as long as they repay the loan in the same transaction. While flash loans have enabled new DeFi use cases and financial products, they have also introduced a new attack vector: flash loan attacks.

Flash loan attacks are a type of exploit where an attacker can borrow a large amount of funds through a flash loan and manipulate the price of a DeFi asset. The attacker can then use the manipulated price to make a profit in another DeFi platform, such as by buying a low-priced asset on one platform and selling it for a higher price on another platform. Once the attacker makes a profit, they can repay the flash loan, leaving no collateral or obligation to repay the funds.

One example of a flash loan attack occurred in February 2021 on the DeFi platform PancakeBunny. In this attack, the attacker borrowed a large amount of funds through a flash loan and used them to manipulate the price of BUNNY, the platform's native token. By manipulating the price, the attacker was able to withdraw a large amount of liquidity from PancakeBunny's BUNNY-BNB pool, causing the price to drop significantly. This allowed the attacker to buy back BUNNY at a lower price and repay the flash loan, earning a significant profit in the process.

Flash loan attacks can be devastating for DeFi platforms, as they can cause significant financial losses and undermine user trust in the platform. These attacks can also create a ripple effect, as the manipulation of one asset can affect the price of other assets in the platform's ecosystem. Moreover, flash loan attacks can be difficult to prevent, as they are often executed through complex and sophisticated techniques that exploit the vulnerabilities in the DeFi smart contracts.

Understanding the Risks

The decentralized nature of DeFi platforms presents both opportunities and challenges. On one hand, it empowers users by removing intermediaries and reducing fees. On the other hand, it places the responsibility for security squarely on the shoulders of dApp owners and developers. With millions of dollars at stake and an ever-growing number of DeFi platforms, hackers have ample motivation to target this nascent industry.

Smart Contract Audits and Web3 Penetration Testing

The first line of defense against DeFi attacks is a thorough smart contract audit. By identifying vulnerabilities and addressing them before deployment, DeFi platforms can significantly reduce the risk of hacks. HYDN's smart contract audits leverage our extensive experience working with leading DeFi projects, such as SushiSwap, SpookySwap, and Sablier, to ensure that your platform is built on a solid foundation.

Web3 penetration testing is another crucial component of a comprehensive security strategy. This process involves simulating real-world attack scenarios to identify weaknesses in your platform's infrastructure. HYDN's Web3 penetration testing experts will help you uncover and remediate vulnerabilities, keeping your DeFi platform safe from potential exploits.

Real-Time Fraud Prevention for DeFi with HYDN Prevent

While audits and penetration testing are essential, the rapidly evolving landscape of DeFi attacks necessitates a more proactive, rather than reactive approach to blockchain security. The logical solution to this is real-time fraud prevention for dApps...

That is where HYDN Prevent comes in. 

Currently the blockchain security market features a number of products focused on Monitoring and Alerting, but these usually result in reactive security measures being taken. That is, a project is alerted that an attack is either taking place or about to take place and by the time they can react it is too late. HYDN have taken things to the next level by building the HYDN Prevent execution engine which stands unrivalled in the market, eclipsing competitors by not just detecting and alerting, but proactively stopping threats.

HYDN Prevent is our real-time fraud prevention product for DeFi which analyzes every transaction that interacts with your dApp's smart contracts, identifying and blocking malicious ones, whilst having no impact on the user journey of legitimate users. With over 100 detectors covering a huge range of common attack vectors such as Reentrancy Attacks, Oracle Manipulation, Phishing Attempts, Contract Impersonation, Role Changes, and more, HYDN Prevent can detect and prevent almost all attacks in real-time, saving your dApp millions.

We have made integrating HYDN Prevent as simple as possible with a 5-minute integration all that is required.

HYDN Prevent's real-time fraud prevention for blockchain ensures that your DeFi dApp’s assets and reputation remain protected even when under attack.

If you’d like more information about HYDN Prevent or would like to sign up to the service head to our sign-up page now.