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Yearn Vault Exploit Shocks DeFi Industry

Posted by
Ilya Abugov

DeFi Update | Week #5, 2021

This week in DeFi was full of updates and releases, but the industry got a bit of a scare with the exploit of a Yearn vault. In this article we look back at the week in DeFi.

For most of the week there was positive news from the Yearn ecosystem. Alpha Homora launched V2, and SushiSwap unveiled MISO. Moreover, the minting issue was resolved, with the community deciding to increase YFI supply by 6,666 tokens. Andre Cronje was teasing upcoming updates with screenshots, and all seemed good with the ecosystem.

Yearn Victim of DeFi Exploit

Then came the $2.8M exploit of the v1 Dai vault. While no official recap from Yearn has been posted, it appears that this was a complex operation. However, it looks like the team was able to, relatively quickly, address the issue. (Source)

However, this does raise some macro concerns. The Yearn ecosystem has been busy shipping new DeFi products and features increasing interconnectivity between individual projects and the complexity of the system. With the Iron Bank now offering uncollateralized loans and enabling greater leverage, the risk to the Yearn network and the broader DeFi ecosystem may be underappreciated.

As the Yearn ecosystem continues to expand it becomes more systemically important to DeFi as a whole, a significant issue could cause a domino effect that would potentially be more severe than the near collapse of MakerDAO in March 2020.

Interest in uncollateralized loans

Still, the industry appears to be getting more intrigued with uncollateralized loans. While CREAM’s Iron Bank has received much of the attention, Goldfinch has raised $1M to continue developing its loan product. Its current pilot program has seen $1M borrowed and deployed by participating entities.

Uncollateralized loans are much more efficient in terms of capital use, however, they also carry more risk. It will be incredibly important for the industry that it is properly managed by the projects experimenting with this financial instrument.

Speaking of managing risk, options platforms continue to develop. Opyn raised $6.7M in a Series A, while the Hegic ecosystem saw the arrival of a secondary market on hetoro. Hedging is an important tool in a trader’s arsenal, and as decentralized options platforms mature, the market may see the arrival of more complex products and strategies.

TrustSwap, has approached industry risk from another angle and introduced SmartLaunch to try to curtail the number of scam tokens and code exploits in the market. It remains to be seen how effective TrustSwap’s undertaking will be, and if it forces the industry to reevaluate existing standards and processes.

Gas fee problems in DeFi

With the Ethereum DeFi space growing, gas costs remain a serious problem. Teams are forced to consider L2 solutions or alternative blockchains. While Polkadot has been getting a lot of attention, BSC has been quietly getting a significant amount of traction recently.

As an EVM compatible blockchain, it offers an easy option for projects that were originally considering or are already working on Ethereum. IDEX is one of the latest Ethereum DeFi projects to give BSC a try. In fact, the Ethereum rival saw $15B in transaction volume last month. Given Binance’s brand and infrastructure it may become a serious player in the on-chain market.

The information provided here is for informational purposes only. This is not investment advice and should not be treated as such. Strategic Round Capital and/or the author of this article holds a position in BTC, ETH, YFI, HEGIC.

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