Lately, the advancement of decentralized finance (DeFi) has influenced the financial sector by encouraging seamless, permissionless, and borderless access to the sphere. With the support of blockchain technology, DeFi eliminates the need for traditional intermediaries like banks and brokers, empowering individuals with full control over their assets.
Meanwhile, the noticeable refinement came at a price—an increase in cyber attacks such as smart contract exploits, phishing scams, and protocol hacks. The increasing threats and negative trends have clouded the future of the sector birthing questions like should governments embrace DeFi or introduce stern regulations to manage these risks?
Insight into the growing attack on DeFi
DeFi project has helped to streamline financial services like lending, borrowing, trading and earning yields on digital assets without depending on centralized setups. However, while the decentralized posture of the sector has attracted individuals yearning for financial freedom, the presence of bad actors in the space is also increasing.
In 2023, DeFi platforms lost more than $787 million to malicious actors according to Hacken, a blockchain analytics company. Also, in 2024, DeFi projects lost just $474 million to hackers, representing a noticeable 40% drop from the previous year.
The most significant DeFi hack during the year manifested through a $55 million cyber attack on Radiant Capital. Conversely, centralized finance platforms lost $694 million to cyber infringement, underlining the vulnerability of the sector to security breaches.
More so, the drop in cyber attacks is due to the advanced security measures most DeFi projects adopted to combat the menace. Some of these measures include stronger protocols, enhanced bridge security and cutting-edge cryptographic systems like zero-knowledge proof.
Furthermore, some of the common types of DeFi attacks include smart contract exploits, oracle manipulation, rug pulls, flash loans attacks. The decentralized posture of the DeFi space and absence of a regulatory framework make it complex to nail down the attackers and recover stolen funds.
Call for DeFi Regulation
The incessant attack on decentralized finance projects has intensified the call for proper regulation, with emphasis that it will help protect investors and ensure the stability of the sector. On consumer protection, critics suggested that a host of investors do not have solid education, thus, exposing them to fraudulent projects.
They emphasized that under a regulatory regime, projects teams will forcefully embrace transparency, timely audits, risk disclosures, and other safe practices. Also, traditional financial institutions pointed to how the lack of system integrity has limited the presence of Know Your Customer (KYC) and Anti-Money Laundering measures, making the DeFi space a home for bad actors.
If not properly checked, the industry can pose serious threats to the global financial system. Similarly, the cohesion of DeFi platforms can result in serious contingency issues affecting the stability of the broader market.
For governments, one of the major drives behind the call for DeFi regulation is tax compliance. As a result of the cumbersome process of tracking transactions in the decentralized finance sphere, governments are struggling to establish a taxing system, resulting in serious revenue loss.
Therefore, introducing a regulatory standard in the system will help ensure tax compliance. These factors have intensified the call for DeFi regulation across various jurisdictions including the EU that aims to establish an oversight regime for the sector through the Markets in Crypto-Asset (MiCA) regulation.
Need for decentralized finance adoption
While the call for DeFi regulations keep intensifying, community members propose that instead of outright oversight, governments should instead partner with the sector. They argued that the industry has created a pathway for the unbanked to enjoy a variety of financial services.
Similarly, market participants claimed that excessive regulation could limit innovations and opportunities for economic advancement. There are submissions that the core of decentralized finance is to ensure financial liberty from excessive controls from centralized institutions. However, regulations could defeat the actual purpose of the innovation, creating more chaos.
Also, enthusiasts opined that instead of regulating the sector, the government can instead introduce sandbox models that’ll support the growth of the sector under stern supervision.
Parting Words
To an extent, the growing rate of cyber-attacks across the DeFi sector poses a serious concern that requires urgent attention. Still, a strict regulatory regime is as dangerous as allowing the sphere to remain without proper regulation.
As a result, it has become imperative for governments to introduce a system that will foster investors’ protection and aid the sector to flourish. By that, it is a must for regulators across the globe to push for the advancement of the decentralized finance space rather than militating against its existence.
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