In the first two articles, we analyzed the technical security aspects of DeFi, including smart contracts, front-end, and communication. However, even if a project is technically flawless, it may still collapse due to flaws in the economic model, human weaknesses, or regulatory pressures. This article will delve into the 'deep waters' of DeFi security, exploring the three key dimensions that determine the long-term sustainability of a project: financial security, human security, and compliance security.
Part One: Financial Security - Beyond Code's Economic Logic
Financial security focuses on the inherent robustness of DeFi protocols as financial products. User losses may not be due to theft but rather because the economic model of the protocol itself carries risks.
Launch and Distribution Fairness
Pre-mining / Insider Trading: Refers to project teams or early investors acquiring large amounts of tokens at very low costs before a public token issuance. This unfair distribution lays the groundwork for subsequent market manipulation.
Market and Systemic Risks
Whale Attack: Large holders (whales) can easily manipulate prices through massive buying and selling, leading to liquidation or losses for smaller retail investors.
Pump and Dump: The project team or whales jointly inflate the coin price to attract retail investors, and then sell at high prices, causing a price crash and completing the harvesting.
Black Swan Event: Extreme market fluctuations (such as a market crash) may cause a protocol's liquidation mechanism to fail or collateral value to fall short, triggering systemic collapse.
Composability Risk: The charm of DeFi lies in its 'Lego-like' composability. However, when one protocol relies on the assets or services of another protocol (e.g., using LP Tokens from other protocols as collateral), it also inherits all the risks of the protocol it depends on. The collapse of one protocol may trigger a chain reaction (cascading failure).
Advanced Attack Techniques (Scientist Arbitrage)
Front-running / Sandwich Attack: Transactions are public in the public chain's memory pool (Mempool) before being packed. Attackers (scientists) can monitor the memory pool, discover large transactions, and by paying higher gas fees, execute their transactions before or sandwiching the target transaction, allowing for risk-free arbitrage.
Flash Loan Attack: Flash loans allow users to borrow large amounts of funds without collateral within the same block. Attackers often use flash loans to amplify funds and arbitrage against protocols with price oracle vulnerabilities or logical flaws, instantly draining the protocol's funds.
Part Two: Human Security - The Cornerstone of Trust and Betrayal
Human security explores risks surrounding 'people', particularly the project team.
Internal Malfeasance (Rug Pull): This is the most direct human risk. The project team exploits their management authority in the contract (if the authority is too great and unchecked) to directly abscond with user funds from the protocol and disappear.
Social Engineering: Attackers may use phishing, impersonation, and other methods to deceive project team members into revealing their private keys or management permissions, thereby gaining control of the protocol.
Community Governance Risk: In decentralized governance (DAO), voting rights may be overly concentrated, allowing whales to vote in ways that harm the interests of smaller holders. Alternatively, the governance process itself may be exploited by attackers.
Core Principle: For anonymous or disreputable teams, their permission settings must be viewed with the highest level of skepticism. Time locks, multi-signature arrangements, and custody of keys by reputable third parties are necessary means to check human nature.
Part Three: Compliance Security - The Unavoidable Sword of Damocles
Compliance security is an increasingly growing external risk faced by DeFi projects.
Core Compliance Areas
AML/CFT (Anti-Money Laundering/Counter-Terrorism Financing): Regulatory authorities require financial institutions to identify and report suspicious transactions.
KYC/KYB (Know Your Customer/Know Your Business): Identity verification for users or entities.
Sanctions Compliance: Prohibiting transactions with sanctioned individuals, entities, or countries.
Securities Law Compliance: Many DeFi tokens may be classified as securities, thereby subject to strict legal regulation.
Impact on Users
Privacy and Centralization Trade-off: To meet compliance requirements, some DeFi projects or front-end interfaces have begun integrating KYC processes or restricting access to IPs from sanctioned regions. This has sparked intense debates about privacy and the spirit of decentralization.
AOPP Protocol Controversy: The Address Ownership Proof Protocol is a typical example. It aims to help users prove their ownership of an external wallet address to regulated exchanges for withdrawal purposes. However, critics argue that this establishes a strong correlation between on-chain anonymous addresses and off-chain real identities, undermining user privacy. Wallets like Trezor removed support for this protocol under community pressure, reflecting the community's heightened sensitivity to privacy issues.
Core Viewpoint: In the current macro environment, DeFi projects cannot completely detach from the legal framework of the real world. Users should also consider the project's compliance stance and potential regulatory risks when choosing a project. Between 'anti-censorship' and 'embracing regulation', different projects and users will have different choices, but this has become an unavoidable topic.
DeFi security is a dynamically evolving system. A protocol that seems secure today may become vulnerable tomorrow due to new attack methods, market changes, or regulatory policies. A security audit report is merely a snapshot of the project at a certain point in time. As users, we must establish a dynamic view of security, continuously monitor project progress, community feedback, and security dynamics to navigate this new financial frontier of opportunities and risks steadily.