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In the past week, there have been two notable hacks of Decentralized Finance smart contracts running on Ethereum, both involving a token called imBTC. The incidents have renewed debates about the responsibility of those who build— and those who use— DeFi apps. They've even led some to question the viability of DeFi in general, given the constant threat of a hack leading to irrecoverable loss of funds.
In this edition of Build Blockchain, we'll take a look at the technical aspects of the incidents and discuss what builders and users should do to protect themselves. We'll also touch on what these hacks say more broadly about the adoption and maturation of DeFi.
One of the features of ERC-777 made both of the attacks possible. While most ERC-20 token transfers are simple atomic state updates, ERC-777 enables users to register a "hook" that is triggered when tokens are sent or received. There's actually nothing wrong with this feature per-se, but in both attacks, it had not been properly accounted for by the DeFi protocol which was exploited. This allowed the hackers to execute subsequent transactions before their first transaction had completed, while the DeFi contracts being attacked were in an unexpected state.
This kind of vulnerability exists because of a computer science property called "reentrancy." If that sounds familiar to you, it's because the hacker behind the infamous attack on "The DAO" used the same technique.
Uniswap has grown as a popular exchange despite this exploit because the overwhelming majority of ERC-20 tokens are not vulnerable to it. Unlike many other DeFi protocols, Uniswap truly is decentralized. The contracts are truly autonomous, with no administrative privileges or pause functions, and users can trade any token that is ERC-20 compatible.
Unstoppable code is, of course, one of the properties that makes smart contracts so interesting. It gives us the ability to build systems that no one can modify once they're running. As usual, though, the flip side of a strength can manifest as a weakness. We saw that in this case. Despite the fact imBTC was vulnerable to a known weakness in the Uniswap architecture, users which had chosen to trade the token couldn't be prevented from doing so— not even for their own good.
In a surprising twist, the hacker made a mistake that revealed his or her IP address. Presumably fearing legal consequences, the hacker ended up returning all of the stolen funds to dForce after several days of back and forth negotiation with the company. Emilio Frangella wrote an excellent breakdown of the ordeal in The Defiant. Link.
Who is responsible for ensuring the security of smart contract apps— the developers who create them or the users who deposit their money into them?
There is no doubt that DeFi protocols should be extensively audited before launching, preferably by two or more auditors, and that contract code should be developed carefully and slowly by experienced teams. While this definitely should be the case, it's not clear exactly how the ecosystem can afford it.
Audits and smart contract experts are expensive, and we haven't yet worked out what DeFi business models look like. The community rightly demands those building DeFi apps "take responsibility," but it also demands systems that are "fully decentralized," generally meaning there is little opportunity for the entities building them to earn a profit. We find ourselves, then, back at a common problem in the crypto ecosystem: how do we adequately fund important public goods?
Audits also aren't bulletproof. The dForce protocol was professionally audited and the exploit was still missed. As mentioned, the Uniswap exploit used in this attack was known because of an audit, yet users chose to trade it on the platform anyway. The truth is, users must also take some responsibility for the money they are putting at risk. That starts with a simple principle: never put more money into DeFi than you can afford to lose. Everyone says this, but clearly not everyone listens.
