DeFi’s ‘Flash Loan’ Crisis Worsens, Algorithms to the Rescue

Pancake Bunny, BurgerSwap, Belt Finance — What do these three protocols have in common?

Apart from them being DeFi-based, they all have been victims of flash loan attacks in the past month. Based on data estimates, nearly $167 million has been siphoned in May 2021 by perpetrators who have leveraged zero-collateral loans to the T.

Latest Attacks; the Flash Loan Crisis is Here to Stay

Pancake Bunny, a Binance Smart Chain-based yield-farming aggregator, was attacked on 20 May. The valuation of the flash loan attack is estimated to be around $200 million. Termed as an “economic exploit” by the team, the incident took a massive toll on the project’s health, and its token BUNNY saw a 95% dump in price.

Similarly, BurgerSwap, a decentralized automated market maker on BSC, lost $7 million through 14 transactions on 28 May. The hackers, as claimed by the BurgerSwap team, created a fake coin to initiate the attack. They then adjusted the routing to manipulate the prices and steal the funds.

Furthermore, Belt Finance, a DeFi platform providing market-making solutions, lost a whopping $50 million to a flash loan attack. By creating a smart contract that uses Pancake Swap for loans, the hackers exploited the beltBUSD pool. And in 8 transactions, damage of $50 million, including a profit of $6.2 million, was inflicted.

These attacks feature here due to recency bias. But, these stats reflect the voluminous nature and the frequency of these attacks. Unfortunately, with no concrete measures in place, the flash loan crisis shall continue to deter users from investing in DeFi-based projects.

Vulnerabilities in the DeFi Space

The increased frequency of flash loan attacks is sending ripples across the DeFi community. Apart from the monetary loss, we also see a major dip in confidence amongst the dApp developers. Likewise, these headlines further fuel skepticism against the blockchain and DeFi community impeding the efforts being put in for their mass adoption.

All these factors culminate in questioning the amount of undue risk in the DeFi space with special emphasis on its security and integrity. With over $66 billion locked in DeFi, it is time the vulnerabilities in the DeFi space are solved in absolute terms.

The CMO of Chainlink Labs, Adelyn Zhou stated that “flash loan attacks do not create vulnerabilities within DeFi – they simply reveal vulnerabilities that already exist.” This statement calls out the DeFi protocols that are still relying on centralized oracles.

Looking at the modus operandi of the flash loan attacks, hackers place their bets on vulnerable centralized oracles to become temporary whales. This provides them the capital and the leverage to influence, manipulate, and siphon funds of gargantuan proportions.

This leaves us with the conclusion that any DeFi protocol dependent on a sole price oracle is vulnerable to flash attacks. But, what if the trading infrastructure promoted the interconnectivity of the centralized exchanges? Then, oracles dependent on multiple exchanges, with volume and liquidity differences, can shield themselves against flash attacks.

This is specifically what Flowdesk aims to achieve with their market-making infrastructure. By combining more than 40+ platforms, Flowdesk advances the interconnectivity of centralized exchanges.

The Dire Need for Market-Making Between CEX and DEX

The cryptocurrency market is fractured, and exchange platforms are scattered across the globe. Although we can see this as an advantage to crypto projects, more often than not, this dissociated liquidity comes at a crucial cost.

Maintaining a project token’s liquidity is a must, and although DeFi helps projects manage their own tokens, the tools to apply these principles are missing on centralized exchanges (CEXs) like Binance and Coinbase.

To surmount these challenges, Flowdesk, a technological market-making company is aiming to bring liquidity to crypto projects across all platforms — CEXs and DEXs — 24/7. Their financial expertise coupled with their specialized market-making algorithms enables constant liquidity and healthy market conditions for the digital asset ecosystem that, in some cases, is extremely volatile.

As the trend of Bridges, Swaps, and L2 protocols gets widely popular, it is important to maintain credible market conditions across every trading pair, on all protocols at all times. This helps prevent arbitrage opportunities that defer early investors from investing in projects. Liquidity and trust take time to build organically, and it’s mandatory for any project to survey their market. With Flowdesk’s constant market data aggregation and normalization, every project can have a global view of their market and an understanding of their market flow.

This trust is also built with the help of the virtual assets service providers. As cryptocurrency becomes broadly accepted and known, its reputation still needs to be proven. Flowdesk aims to bring back trust into the digital asset ecosystem. As such, they are operating in France, the nation with one of the strictest regulatory frameworks, and are awaiting the deliverance of the Digital Asset Service Provider (DASP) authorization from the French regulating authorities. While these frameworks can be seen as strict, they aim at protecting the end-users, who very often suffer due to the risks posed by the inferior quality of certain DeFi protocols.

Conclusion

Being an algorithm-bound market maker, Flowdesk is championing the upkeep of regulatory compliance. Not only are they infusing trust into the industry but their open-source culture is also promoting collective growth. Both these factors together contribute to making DeFi and the crypto market more healthy and trustworthy. With these attributes in place, their widespread adoption turns into a mere formality.

Image by Gerd Altmann from Pixabay