• Tuesday’s Poly Network hack was the greeted decentralized finance security breach in history, but the crypto market remained steady
  • While the hack does reflect a need for greater security in the space, it is unlikely to sway broader institutional investor interest, experts say.

In the largest decentralized finance hack in history, perpetrators stole more than $600 million from interoperability protocol Poly Network Tuesday, but the security breach does not seem to have investors concerned. 

“I don’t think anybody cares, it’s not good and it’s going to obviously lead to people being more cautious,” said Daniel Matuszewski, co-founder of CMS Holdings. “But here’s the reality of it, it’s a pretty risky section of a risky chunk of our industry; it’s a cross-chain product. These are the riskiest of the risky places.” 

The hackers exploited Poly Network on DeFi exchanges Polygon, Ethereum and Binance Smart Chain. Poly Network is a cross-chain protocol for swapping tokens across various blockchains. Cross-chain protocols act as a way to connect different blockchains and enable transfers between protocols, acting as a bridge. 

The broader cryptocurrency market did not seem to have a significant reaction to the hack. Bitcoin and ethereum dipped slightly initially following the news, but were both trading in the green later in the day Tuesday. 

“Those who have allocated to the crypto landscape for a while are very numb to these exploits,” said Imran Khan, lead at the DeFi Alliance. “We’re still very early, and these economic hacks are essentially ways to improve the overall ecosystem over a long period of time.” 

The hacks, Khan explained, reveal which areas in the space need more work. 

“We’re seeing a lot of attacks right now with cross-chain swaps, and that’s an area that we’re not going to allocate as much capital to,” said Khan. “That’s what we’re doing internally, and I could see that happening everywhere else, too.” 

Swaying institutional interest

While the hack does reflect a need for greater security in the space, it is unlikely to sway broader institutional investor interest, experts say. 

“Frankly, these investors don’t care about one particular project, or even five particular projects, they are much more thematic,” said Michael Moro, CEO of Genesis. “They are wondering if DeFi will be a thing in the next ten years.”  

Investor interest in DeFi today, Moro said, comes down to three areas: ease of onboarding, potential for returns and the actual product or service the DeFi protocol is attempting to accomplish. Investors today are primarily concerned with returns and onboarding, Moro said, but that will eventually change.” 

“For institutional investors, there are few that believe the product is the number one narrative — it’s not the number one reason why they are using DeFi,” Moro said. “We’re not there yet, but that’s okay because these [institutional investors] are investing for that future.” 

A need for improvement

For those concerned with the current security of DeFi protocols, experts agree that there are areas in need of improvement. 

“People need to realize that many of these DeFi platforms don’t offer the security that some of the big centralized exchanges offer,” said Charlie Silver, Permission.io CEO. “DeFi long term is fantastic, but it is still immature and not really ready for consumers that don’t have high tolerance for risk.” 

Still, the dust hasn’t settled yet from the hack and it is not clear how more traditional institutions will respond. In a recent survey of global institutional investors conducted by London-based Nickel Asset Management, 76% of respondents cited security concerns related to custody as a reason preventing them from investing.

While savvy crypto native funds that are the most active market participants understand the risks of investing in DeFi protocols, many less technical institutional investors do not.

“The smart money at institutions know DeFi is the future of finance,” said Silver. “However, operators of platforms will need to demonstrate that security is job one.” 

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  • Blockworks
    Senior Reporter
    Casey Wagner is a New York-based business journalist covering regulation, legislation, digital asset investment firms, market structure, central banks and governments, and CBDCs. Prior to joining Blockworks, she reported on markets at Bloomberg News. She graduated from the University of Virginia with a degree in Media Studies. Contact Casey via email at [email protected]