Ethereum DeFi Circuit-Breaker Could Reduce Losses by 70%

According to the developer of the newly released Ethereum DeFi circuit breaker, ERC-7265 proposal, billions of dollars worth of cryptocurrencies could have been prevented from being stolen from DeFi protocols in 2022 if a decentralized financial “circuit-breaker” was in place.

The lead developer, Diyahir Campos, unveiled the proposal as an Ethereum Request for Comment (ERC) on July 3rd. The circuit-breaker aims to establish a standard for a smart contract capable of stopping suspiciously large token outflows from a DeFi protocol.

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Last year, there were a significant number of crypto hacks in which at least $3.1 billion was stolen from DeFi protocols, with cross-chain bridges accounting for 65% of the losses

Campos stated that circuit breakers could have prevented a significant portion of these losses, claiming that “with those that weren’t carpets, probably 70% of the money could be saved with minimal impact on users.” He disclosed that he was personally affected by the $195 million Euler Finance attack in March, which had a cascading effect on eleven other protocols.

Campos questioned the reason that allowed 100% of Total Value Locked (TVL) to leave a DeFi protocol within seconds or a few blocks, especially when the typical movement of TVL in a day is about 20%. He emphasized that movement of more than 30% or 40% was a potential exploit, not regular usage.

However, the Ethereum DeFi circuit breaker proposal was met with some skepticism and criticism

Some fear that the circuit-breaker could be used for potentially nefarious purposes, allowing DeFi developers to freeze users’ funds indefinitely. Campos acknowledged these concerns and clarified that the circuit-breaker is an optional feature for DeFi projects. He also emphasized the need for a well-designed circuit-breaker to strike a balance between protecting users and avoiding “false positives” that could cause unnecessary interference.

Campos emphasized that a circuit-breaker would be ineffective for internal carpet pulls because it could be easily disabled by the protocol’s control team. He explained that the concept of a circuit-breaker was inspired by similar mechanisms that global exchanges use to calm markets during periods of extreme volatility, but at DeFi the intent is to prevent losses caused by hacker attacks.

Work on the proposed standard began during an April hackathon in Tokyo with other developers including Meir Banks, co-founder of Hydrogen Labs; Philippe Dumonet, founder and CEO of DeReg; and Blagoj Dimovski, co-founder and former CTO of Diagonal Finance, who is joining the initiative. Campos expressed confidence that the standard will be ready for integration into protocols within a few months, representing a significant step toward improving the security and resilience of DeFi ecosystems.

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First published in COIN KURIER, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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