Bitwise’s Hougan: DeFi Hacks Show We’re Early in this Space

After two major hacks in less than a week, the security of DeFi projects is on everyone’s mind

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Matt Hougan, Chief investment officer, Bitwise; Source: Bitwise

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key takeaways

  • Japanese exchange Liquid Global was hacked for an estimated $97 million this week
  • While hacks exist in DeFi, they are becoming less prevalent overtime, experts say

Just over a week after the greatest decentralized finance (DeFi) security breach in history, Japanese cryptocurrency exchange Liquid Global was hacked Thursday, resulting in more than $90 million in stolen assets. The hacks highlight vulnerabilities that exist on decentralized exchanges and signal that further regulation, which policymakers have promised is coming, may help advance the industry, experts say. 

“Every time there’s a major security hack, professional investors and the crypto industry in general, take note,” said Matt Hougan, chief investment officer at Bitwise. “It’s like a persistent reminder that we’re still extremely early in this space.” 

Liquid Global announced the hack via Twitter, where the exchange revealed that its warm wallets had been compromised. Warm wallets sit between hot wallets, which are connected to the internet, and cold wallets, which operate offline. The advantage of the hybrid warm wallet is added security, in theory, plus the ability to make transactions, which cold wallets do not support. Liquid Global said that it moved other assets into cold wallets for added protection following the hack.  

The exchange did not reveal an estimate for the amount stolen, but blockchain analytics company Elliptic estimates that hackers made off with about $97 million in digital assets. 

“I know it seems like these hacks happen all the time, but the frequency of hacks versus the scale of the market is diminishing over time,” said Hougan. “It is a reminder that this space is still new, it’s still evolving and still uncertain. I think it’s one of the things that drives institutional and professional investors to go with large, established trusted brands, which is definitely a trend that we’re seeing.” 

Hacks, others point out, are not unique to the digital asset space. 

“These hacks seem to happen more frequently, so many people get scared of trading or using cryptocurrencies,” said Laurin Bylica, co-founder of TheStandard.io, a DeFi infrastructure project. “However, this is not particularly a downfall of the crypto space, as hacks also happen every day in the world of fiat money.”  

The hack comes shortly after US Securities and Exchange Commission Chair Gary Gensler hinted that the DeFi space needs greater regulatory oversight, which may advance the industry in the long run, Hougan said. 

“DeFi is not immune to regulatory oversight. I think that clear regulation in the DeFi space is what will unlock the next major bull market,” he said. “One of the criticisms of DeFi is that it only operates inside the confines of crypto, and I think for it to move beyond that it’s going to need regulatory clarity.” 

Regulation is, of course, fundamentally at odds with the founding principles of cryptocurrencies, Hougan acknowledged. 

“Crypto comes from a sort of anarchic, anti-regulatory origin story, and that ethos still permeates part of the community who would argue that these platforms don’t need to be regulated, and it is up to the users to make sure they’re not subject to fraudulent activity,” he said. “I don’t think that washes with everyday reality.” 

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