Centralization Caused Most DeFi Hacks of 2021, $1.3B Loss to Users in 2021

The growth of the digital currency ecosystem comes with so many challenges chief of whom is security. Innovative sectors of the industry, particularly decentralized finance (DeFi) have borne more of the brunts of security lapses in the past year, with blockchain security and audits firm, Certik pegging the total losses due to hacks at around $1.3 billion of user’s funds. 

Certik shared in its latest DeFi security report that it audited a total of 1,737 projects in 2021. Of these numbers, Ethereum-based projects make up about 42%, and Binance Smart Chain-based projects made up the vast majority of this number with 36%. While it remains one of the most popular audit firms in the ecosystem, the number shows how widespread more innovators are coming into the space.

Beyond DeFi, Certik pointed out that newer trends were seen in Non-Fungible Tokens, and blockchain gaming both of which went mainstream in the previous year. The downside of this growth is the inability to keep up pace with the right security to keep the space secured, with centralization of operational models cited as one major fault amongst protocols that suffered mishap last year.

“With such explosive growth, blockchain security became more important than ever. While the dollar value of losses due to hacks and exploits increased, the proportion they represented of DeFi’s market capitalization decreased yearover-year,” the Certik report reads, “Centralization issues were the most common attack vector exploited in the $1.3 billion in user funds lost in total, across 44 DeFi hacks. This underscores the importance of decentralization and highlights the fact that many projects still have work to do to reach this goal.”

Besides centralization, the utilization of an unlocked compiler version, reliance on third-party dependencies, and missing event emissions were also sources of major security breaches in the DeFi ecosystem. While protocols like the Poly Network survived its hack as the hacker returned all of the stolen funds, Certik believes security will always remain a major challenge in the ecosystem with increasing growth and sophistication.

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Dorsey Takes Aim at Web3 Over VC Involvement

Key Takeaways

  • Dorsey agreed with comments on Twitter today that were critical of Web3.
  • Many are worried about the disproportionate influence of VCs in the space.
  • This has inspired movements such as #OccupyDeFi.

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Jack Dorsey, CEO of Twitter and Square, criticized the growing Web3 movement today as being heavily controlled by traditional financial institutions and venture capital firms. In a tweet, @notgrubles wrote, “There is no web3, only webVC.” Dorsey responded simply with, “True.” 

Web3’s Decentralization Woes

Jack Dorsey does not seem impressed by Web3 advocates’ claims of “true decentralization.”

The Twitter, Square CEO had little to say on the subject, but his single-word response to another tweet critical of Web3 as “WebVC”—which simply read, “True”—carried significant weight.

Web3 portends to be a trustless, decentralized version of the web built on blockchains, such as Ethereum and Polkadot. While some hail Web3 as the future of the internet, Dorsey and others seem suspicious of the large amount of VC money pouring into the space. By some estimates, as much as $17 billion in VC funding flowed into cryptocurrency projects in the first half of 2o21 alone. The implication of Dorsey’s tweet, it would appear, is that this level of investment affords VCs undue influence over the entire space. 

While Dorsey has been involved with Bitcoin only, he has not explicitly dismissed Ethereum. However, he has expressed concern over blockchains other than Bitcoin before, with criticisms generally focusing on “founding principles, security, and centralization.” 

Dorsey’s reservations may not be unmoored from reality. In July, Uniswap’s level of decentralization fell into question when the DeFi Education Fund, elected by UNI governance proposal, sold half of its allocated UNI tokens. The concern with the vote on the DeFi Education Fund, critics said, was that large VC delegators could overwhelmingly impact the outcome of the vote simply by owning outsized stakes in the network. Only one month later, these same large delegators came under fire for voting to award a $25 million grant to a single data-analytics firm. 

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Moreover, VC firms tend to have outsized influence in their ability to lobby for public policy. 

Concerns over decentralization and over-bearing VC control in the space have sparked a social media movement that some are calling #OccupyDeFi. A group called Frog Nation, composed of various DeFi projects itself, is leading the pursuit of decentralization in DeFi. Daniele Sestagalli, co-founder of one of these projects, Abracadabra.Money, tweeted that the goals of #OccupyDeFi are “keeping DeFi open, decentralised and censorship-resistant.”

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Government Centralization Vs. Bitcoin Decentralization

Greg Foss and Aaron Segal joined “Fed Watch” to discuss the current battle between governments and Bitcoin.

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Listen To This Episode:

Hosts: Christian Keroles and Ansel Lindner

Guests: Greg Foss and Aaron Segal

In this special episode of Bitcoin Magazine’s “Fed Watch” podcast, we sat down with two bright minds in the bitcoin space, Greg Foss and Aaron Segal, to discuss the global process and interplay of centralization and decentralization in society. It was a sort of a panel discussion with Keroles guiding our topics.

The Current And Future Battle Between Centralization And Decentralization

Segal opened with introducing five axioms of centralization versus decentralization, which are the subject of an upcoming essay of his: One, the fluctuation between centralization and decentralization is one of the driving forces in history; two, centralization and decentralization can come in many forms; three, decentralization is more stable in the long run; four, technology can be useful in either direction; and five, Bitcoin is a uniquely decentralizing force.

A very interesting point Segal brought up immediately was how the system promotes the buy-in of the people by entangling their assets into it. When you start your career in the U.S., you typically get benefits that include things like 401(k) contributions or even stock options. Most people’s savings, if not directly in the stock market or government retirement plans like social security, are in dollar-denominated investments. This leads to the centralization of the system being more sticky than one would expect based on monetary properties of competing systems, because your savings depend on the continued existence of the current system. Bitcoin is about the only way to unstick that investment and avoid a messy transition.

Chinese Economy And Growing Centralization

The panel next applied this line of thinking to the situation in China to tease out dynamics there. What followed was one of my favorite discussions in “Fed Watch” history. Foss pointed out the inadequacy of the Chinese capital markets as small and immature. The impact of recent crackdowns by the CCP on stock listings and companies can only be understood in that context.

Segal added that the CCP appears to be shifting the economy toward new industries. My contribution was to anchor this discussion about China into the expanded decentralization debate. Nation-states will confront decentralization pressures, but so will the entire international order. The previous era of international bodies like the World Trade Organization (WTO), UN and World Health Organization (WHO), with significant influence will also be affected by decentralization.

The Way The U.S. Is Handling Bitcoin’s Decentralization

The conversation then continued by examining the U.S. and the effect of this wave of decentralization on its society. We noted a rise in war-like rhetoric, and how it affects these centralization dynamics, as well as the greater affinity to a rule of law. The increase in U.S. bitcoin mining and the recent proposed infrastructure bill debate speaks to the U.S.’s position on this.

The U.S. is unique in that it opens up many topics. The panelists agreed that the U.S. is a deeper market and one based more in rule of law, so it should handle this pressure toward decentralization better than most other places. Foss and Segal discussed passive investing as a big problem, “passive investing is communism” is a direct quote from Segal. Conversation even turned to new Bitcoin community entrant Jason Lowery, a member of the U.S. Space Force, writing a dissertation on bitcoin mining as a nuclear deterrent.

As you can see, it was a packed episode, this was only a sampling of what was covered. It’s one of my favorites we’ve ever done and a must listen. Thanks to Foss and Segal for joining us. Perhaps, we can continue this topic in another show soon.


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Michael Saylor Defends BTC Mining Council Embraces Decentralization

Michael Saylor, Bitcoin bull and MicroStrategy CEO, defended Tuesday the newly established Bitcoin mining council against criticisms that it runs to counter the decentralized nature of Bitcoin.  

The news regarding the establishment of the Bitcoin mining council recently caused uproar and encountered criticism. Crypto critics were quick to point out that the formation of such a central governing body contravenes the decentralized ethos of Bitcoin and thus consolidates power over the future of the Bitcoin ecosystem.  

For example, Marty Bent, co-founder of Great American Mining company, aired his views concerning the mining council.

“This move has absolutely nothing to do with green energy or climate. It has everything to do with ‘CONTROL’.” Bent wrote in his newsletter shortly after the announcement. 

However, Saylor refuted to critics, saying that the formation of the Bitcoin mining council aims to ensure the success of a decentralized cryptocurrency, and the source of decentralization is energy consumption.

Saylor said that concerns over the sustainability of energy sourcing had become an existential threat to Bitcoin (BTC). He, therefore, stated that the council wants to defend BTC and manage any concerns, especially from uninformed parties and ensure that people who are hostile to Bitcoin and the crypto industry are not defining baseless narratives, models, and metrics. 

Saylor described the council as an organization whose aim is to standardize energy reporting education, grow the marketplace, and pursue industry ESG goals. He stated that the council’s first task is to create a protocol that would standardize energy reporting requirements for the miners and act as a benchmark versus other industries, giving institutional investors comfort as they enter the crypto space. He further revealed that the group intends to create industry-wide Environmental, Social, and Corporate Governance (ESG) goals.

Saylor explained that ESG is an investing strategy focused on environmental, social, and governance concerns to promote sustainability in the corporate space.

Decarbonizing Bitcoin

On Monday, May 24, Elon Musk and Michael Saylor announced that they hosted a call meeting event with executives of major crypto mining firms in North America, including Marathon Digital Holdings, Galaxy Digital, Argo Blockchain, and others and resolved to promote energy sustainability within the crypto mining space.

The meeting led to the formation of the Bitcoin mining council to accelerate sustainability initiatives, promote transparency of energy consumption worldwide, and encourage miners to use renewable sources.

The council was formed two weeks after Elon Musk suspended that Tesla halted Bitcoin payments for its motor vehicles sales and services, citing the increasing use of fossil fuels for Bitcoin mining and transactions. In addition, the establishment of the mining council comes a week after Chinese authorities imposed a crackdown on crypto mining and trading activities. China is estimated to account for over 75% of the entire processing power on the Bitcoin network.

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Controversial Games Put Binance Smart Chain to the Test

Key Takeaways

  • Binance Smart Chain is supposedly decentralized, despite having just 21 validators.
  • The game developers likely believe that China can influence BSC policymaking due to Changpeng Zhao’s Chinese citizenship.
  • The game has stirred up controversy and accusations of anti-Chinese racism within the crypto community.

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A series of projects on the Binance Smart Chain inspired by violent incidents in Chinese and American history are testing the platform’s decentralization limits.

Tiananmen Square Immortalized on Binance Smart Chain

An anonymous developer has released a game called “Tanks of Tiananmen” on Binance Smart Chain (BSC) to test decentralization on the platform and the Chinese authorities.

The game is based on a 1989 pro-democratic protest when a man stood in front of Chinese military tanks in Beijing’s Tiananmen Square. The act advocated reform, protested corruption, and demanded freedom of the press in China. 

During the event, over one million protestors gathered in Beijing’s Tiananmen Square. Many died in a massacre when the state eventually sent in tanks and armed soldiers. While officials state that 300 were killed, recent figures suggest that as many as 10,000 people died in the protest, run over by tanks and shot by advancing infantry. 

The image of the unidentified “Tank Man” standing in front of a line of tanks became iconic throughout the world.

But due to state controls in China, the image is less widely known and more controversial. The events of Tiananmen Square are reportedly censored within Chinaas is free access to the famous image.

BSC Games Based on Slavery, Violence

Anyone can play the Tanks of Tiananmen game for free. There are 1 million TANK tokens available for free mining using the contract’s mint function.

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Players take on the Chinese state’s role attempting to quell the protests, with each TANK token representing ammunition to be fired at civilians. During the game, players can choose sides—join the military or pro-democracy movement—using these tokens.

A character in the game called CZ, a reference to Binance CEO Changpeng Zhao, is shown on the protesters’ side.

Another game was launched on BSC allowing users to trade “slaves,” likely to attempt to stir up outrage and determine whether BSC is centralized enough to censor its own projects. Twitter has suspended the project team’s account.

Both games were met with immediate outrage due to their insensitive content. What’s more, the Tanks for Tiananmen game may even put real lives in danger. A rise in the game’s popularity could cause the Chinese government to pressure Binance into censoring the multiplayer game. 

Despite the gravity of the move, others suggest that these games test Binance’s centralization.

“By definition, this experiment is supposed to be culturally insensitive. It wouldn’t work any other way,” said Bankless founder David Hoffman.

As CZ pointed out, this is not the first attack of its kind. Bitcoin’s blockchain was used to store links to images of illegal pornography in 2018, perhaps in an attempt to make running a Bitcoin node illegal.

Fears of Centralization

Binance Smart Chain has quickly grown as an alternative for retail users restricted by the high fees on Ethereum. The blockchain’s native token has risen over 900% year-to-date and even grabbed the third spot in market capitalization at one point.

But fewer nodes on the Binance Chain have raised concerns around centralization on the blockchain. BSC only has 21 validators compared to more than 11,000 nodes on Ethereum. 

The function of a node is to verify every transaction on the blockchain. Nodes have the power to update to new consensus rules and force the chain to follow them. The larger the number of nodes, the greater is the degree of decentralization because the majority will reject bad actors.

Due to BSC’s design, users and developers are reminded of EOS, which collapsed due to the unsustainably small number of validators. 

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Binance’s CEO persistently denies any control over the chain.

“A few hater kids think they can bring down a blockchain with some scams/sensitive posts. We honestly can’t control it. But they are just promoting #BSC to their followers.”

Culprits Are Still Unknown

Zhao has said that disgruntled members of the Bitcoin or Ethereum communities created the games to attack BSC. 

Another idea is that there is a war between Sam Bankman-Fried of FTX exchange and CZ. 

Crypto Briefing investigated the matter and noted that the creator of Tanks of Tiananmen received BNB from three addresses before creating the contract, including one address with links to DEGO Finance.

However, the identity of the project team remains unknown at this time.

It’s possible that BSC could censor the game by restricting the blockchain explorers. This move would suspend the listing of these contracts much like Etherscan.io does with projects that don’t adhere to its censorship rules.

Regardless of whether these games are taken down, the attacks are an ongoing reminder of projects’ constant challenges using blockchain technology.

Conflicts between immutability and ethics are always just around the corner.

Disclosure: The author held BTC at the time of press. 

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Ethereum devs grumble as Harvest Finance and Value Defi eye Binance Smart Chain

Today, yield aggregator Harvest Finance and multi-service platform Value DeFi — two Ethereum-native decentralized finance (DeFi) protocols accounting for nearly a billion dollars in total value locked between them — announced planned expansions to Binance Smart Chain, the smart contract platform built by crypto exchange giant Binance.

Not everyone in the Ethereum community is ready to take BSC seriously, however.

Harvest, which is among the largest yield aggregators and currently boasts over 830 million in total value locked, said in a statement to Cointelegraph that the protocol is looking to hire two developers to bring Harvest to BSC.

“At Harvest Finance we think this is an opportunity to show that “cross chain” yield farming is not only possible, it will be one of the next major milestones for the yield farming ecosystem,” said Harvest community moderator Red.

Likewise, Value DeFi and its $40 million in TVL said in a Tweet that they were planning to port their yield-bearing governance vault to BSC, confirming earlier team statements on Discord:

The announcements come during a period of explosive growth for BSC. Projects on Binance Smart Chain such as PancakeSwap have been on a tear as of late, and even before the announced moves the recent run of success has led some members of the Ethereum developer community to ask which is more valuable: a platform scalable enough that all players can feasibly participate, or a credible degree of decentralization? 

Testnet or true ecosystem?

BSC, whose architecture is supported by 21 validator nodes all run by Binance or its affiliates, has been characterized by some developers as an elaborate Ethereum testnet, given its cheap transactions and centralization:

According to Scoopy, the semi-anon co-founder of the forthcoming AlchemixFi project, the centralization means that BSC is destined to remain populated with copycat projects originally born on Ethereum.

“My view on the matter is that while it may offer some improvements to user experience with faster and cheaper transactions, it is counter to the decentralized ethos that has inspired countless developers to build on Ethereum,” they said. “Innovation will continue to be centered in Ethereum as a result.”

Other traders and developers are less concerned with originality and thorough decentralization, however. In an interview with Cointelegraph, Red said that even though Ethereum is “the king of kings,” profit maximalism is what motivates Harvest. 

“Harvest sees a growing number of projects that are attempting to alleviate the pain associated with high gas costs on Ethereum,” said Red. “[…] Harvest is focused on providing the best sources of yield for farmers. If that yield exists on another chain, and can be safely utilized, we will turn on the tractors.”

More accessibility, more users

Aside from developmental and ideological scruples, BSC’s transaction costs are increasingly difficult to ignore for projects looking to provide value for their users. The recent spike is gas costs is a genuine barrier for retail investors, especially when it comes to more complex contract interactions. Value DeFi specifically mentioned these gas costs as a pain point in their BSC announcement. 

Members of the Premia Republic, an all-anon team building the Premia options protocol, said that unless a project is building with explicit decentralization in mind, BSC is simply a path to a larger pool of users capable of using a smart contract product.

“[We] don’t think building on bsc is a bad thing at all. Whether everyone agrees or not, retail and a large portion of the participating market are being priced out of some of the services offered in defi due to gas fees,” they said.

“Some may build/port to bsc because they would like to capitalize on the profits and economic activity happening, but in [our] opinion, you’re simply opening yourself up to an additional market.”