The security of DeFi (Decentralized Finance) is a complex topic that encompasses technical, economic, and human factors. Unlike traditional finance, the risks of DeFi mainly focus on the immutability of smart contract code and the economic models of protocol design.

Below, I will outline the core issues related to DeFi security and provide corresponding analyses.

DeFi Security: Core Risks and Issues

The risks of DeFi can be explored from three main aspects: technical vulnerabilities, economic model attacks, and user operation risks.

1. Technical Vulnerabilities and Smart Contract Risks

This is the most common and largest category of losses in DeFi security incidents.

1. What is a Reentrancy Attack? Why is it one of the main threats to DeFi?

Reentrancy attacks occur when a contract calls an external contract before updating its own state (such as deducting funds). Attackers exploit this vulnerability to repeatedly call the original contract during the external contract's callback, draining funds from the pool. The famous The DAO attack is of this type.

2. Logic errors are the primary cause of the largest losses. Why are logic errors difficult to detect early?

Logic errors are usually not syntax errors in the base code but flaws at the protocol design level, such as improper permission control, lack of input validation, or complex protocol interactions that lead to unexpected results in code execution paths. These errors require deep auditing experience and comprehensive testing to uncover.

3. What is an Access Control vulnerability? What harm does it pose to the protocol?

Key functions in the protocol (such as upgrades, pauses, and large fund withdrawals) may be maliciously controlled by attackers or malicious insiders if there is a lack of proper permission protection (such as governance-only or multi-signature), potentially shutting down functions or directly withdrawing funds (Rug Pull).

4. What are the roles and limitations of smart contract audits?

Auditing is a key step in identifying known vulnerabilities. Role: Deep review of code by a professional team. Limitations: Audit reports typically cannot guarantee absolute security; they only verify the current version of the code. Complex new protocols, on-chain integration risks, or logic outside the audit scope may still have vulnerabilities.

2. Economic models and external factor attacks

This type of attack does not necessarily exploit code bugs, but rather the flaws in the economic mechanisms of the protocol or external data sources.

1. What is an Oracle Manipulation Attack? How is it related to flash loans?

Attackers exploit DeFi protocols with unsafe price sources (for example, using a single DEX or AMM pool as a price source). Attackers often borrow large amounts of money in a short time through flash loans, creating significant price deviations on the price source DEX, and then use the manipulated price to borrow or arbitrage on the target protocol, finally repaying the flash loan.

2. How does the TWAP (Time Weighted Average Price) oracle enhance security?

TWAP calculates the average price over a period rather than using the spot price at a specific time. This means that attackers need to maintain price manipulation over a long period or invest a large amount of capital, significantly increasing the cost of the attack.

3. Where do the governance risks in DeFi primarily manifest?

Individuals or groups with a high proportion of governance tokens can propose and force through malicious proposals (such as modifying parameters for their benefit or stealing funds through contract upgrades). Although this usually requires significant capital, it remains a threat in cases of concentrated token distribution.

4. Why is the cross-chain bridge one of the biggest single points of failure in the DeFi ecosystem?

Cross-chain bridges connect different blockchains and need to hold a large amount of locked assets. Their complexity is high, and they require handling cross-chain consensus or multi-signature mechanisms. Once the multi-signature keys of the bridge are leaked or the logic of the smart contract is compromised, attackers may steal huge assets from both chains at once.

3. User operations and external risks

These risks are not related to the code of the protocol itself, but more to the user's own risk management.

1. What is the primary risk faced by DeFi users?

Loss or leakage of private keys. The private key is the sole control of the asset. Once lost or stolen (through phishing, malware, etc.), on-chain assets cannot be recovered, because there is no centralized entity to help reset passwords.

2. What is the risk of Unlimited Approval?

When users first interact with a new contract, they often give that contract unlimited allowances to spend their tokens. If this contract (or its dependent tokens) has vulnerabilities, attackers can theoretically drain all authorized tokens from the user's wallet.

3. How to identify and prevent 'rug pull' or 'exit scam' risks?

Rug pulling is the act of project parties maliciously absconding with funds. Characteristics to identify: 1. Anonymous team; 2. Rapid growth of Total Value Locked (TVL) but unclear token utility; 3. Extremely high and unsustainable Annual Percentage Yields (APY); 4. Contracts not audited or ownership not relinquished (i.e., the team can still modify key codes).

Summary: Key to ensuring DeFi security

Ensuring DeFi security is a multi-layered, ongoing effort:

  • Developers: Must conduct thorough security audits, formal verification, and ongoing bug bounty programs.

  • Protocol designers: Must ensure oracle security (using TWAP or multi-source verification) and decentralize permission control (such as multi-signature or time locks).

  • Users: Must manage private keys well, restrict contract authorizations (do not give unlimited authorizations), and only invest in mainstream protocols that have been tested over time and by the community.