A decentralized finance “circuit breaker” could have prevented billions of dollars worth of crypto being stolen from DeFi protocols in 2022, according to the developer of the newly published ERC-7265 proposal.
A new Ethereum request for comment (ERC) was published on Github on July 3. In it, the lead developer Diyahir Campos proposed a standard for a DeFi “circuit breaker.” It essentially aims to set a standard for a smart contract with the ability to halt suspiciously large token outflows from a DeFi protocol.
1/ Announcing ERC 7265: Circuit Breaker
We are fixing the biggest problem with DeFi Security – lack of response time to mitigate hacks.
— Meir Bank (@MeirBank) July 3, 2023
Last year was the single biggest year for crypto hacks, with at least $3.1 billion stolen from DeFi protocols, 65% of that coming out of cross-chain bridges.
Speaking to Cointelegraph, Campos said circuit breakers could have prevented billions in losses.
“The ones that weren’t rugs, you could probably save 70% of the money […] with minimal impact to users.”
Campos revealed he was one of the many that lost funds in the $195 million Euler Finance attack in March, which led to contagion that impacted 11 other protocols.
“Actually, I was one of the depositors in the Euler hack,” he said.
3/ Our data analysis shows that DeFi Guardian could have saved more than 50% of losses from the recent @eulerfinance hack.
Instead of draining the entire TVL of Euler within moments, the Euler hacker would have been rate limited, saving tens of millions of dollars for users. pic.twitter.com/Nuck06iQIo
— Meir Bank (@MeirBank) June 1, 2023
“From that experience, I’m looking at the TVL charts and the transactions that happened and really it begged the question:”
“Why would you ever let 100% of your TVL leave in 10 seconds or five blocks?”
A typical DeFi protocol would see around 20% of total value locked entering or leaving a project in a day.
“Once you start talking 30% or 40%, that’s when you really start separating exploits versus daily usage,” said Campos.
The proposed standard has not been without controversy. DeFi researcher Chris Blec was among the skeptics on Twitter concerned the circuit breaker could be used for potentially nefarious purposes.
Oh dear Lord. What is this nonsense?
Giving DeFi devs a protocol-level method that allows them to freeze your money forever?
WHAT COULD POSSIBLY GO WRONG???
— Chris Blec (@ChrisBlec) July 6, 2023
Campos said the circuit breaker isn’t right for every DeFi protocol and isn’t a guarantee that a protocol is safe. He noted the circuit breaker would be an “opt-in thing” for DeFi projects.
He also believes that a well-designed circuit breaker will need to strike a balance between protecting users and preventing “false positives,” as it would be extremely disruptive whenever the breaker trips.
However a circuit breaker would be useless in cases of internal rug pulls, as it could simply be deactivated by the team controlling the protocol.
A quick exploration of the power of circuit breakers in DeFi and their limitations in preventing costly hacks https://t.co/bZKeWJyUkI
— Diyahir (@Diyahir) June 27, 2023
Campos is a smart contract developer at Hydrogen Labs. He said work began on the proposed standard during an April hackathon in Tokyo, alongside Meir Banks, the co-founder of Hydrogen Labs.
The idea for the DeFi circuit breaker was inspired by similar circuit breakers that have been used by global stock exchanges for decades.
“In DeFi, we aren’t trying to calm the markets which is the intention of the [New York Stock Exchange’s circuit breaker] rather we want to prevent hack losses,” wrote Campos in a June 27 blog post.
Other developers working on the standard include Philippe Dumonet, founder and CEO of DeReg and Blagoj Dimovski, the co-founder and former CTO of Diagonal Fiance.
Campos said the standard is still being shaped at this stage but is confident it will be ready “within months” which would put it in “a really good stage” to be integrated into protocols.