Report: Ethereum 2.0 network more prone to DeFi hacks, to 'spend some money'"alleviate the problem

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Babbitt Information (ID: bitcoin8btc)

Babbitt Information (ID: bitcoin8btc)

, Author: Jeff Benson, Compiler: Captain Hiro, Published with permission.

DeFi (Decentralized Finance) has proven to be a double-edged sword for cryptocurrencies. On the one hand, it has brought excitement and good returns to people in the currency circle. At the same time, however, its appearance also poses a certain threat to security. Derivative attacks and other hacks due to DeFi could lead to a rupture of the upcoming Ethereum 2.0 (Eth2) network.

So did Tanner Hoban and Thomas Borgers of ConsenSys. Funded by MolochDao, they used their free time to analyze the incentive structure and security of the long-awaited Ethereum Proof-of-Stake (PoS) network.

In their just-published paper, "Ethereum 2.0 Economic Review: An Analysis of the Ethereum Proof-of-Stake Incentive Model," they argue that:

Derivatives could become a favored attack vector for hackers as the number of options increases and unique financial instruments such as 'flash loans' are exploited maliciously.

However, fear not. They have a solution: spend a little more money to make the web more secure.

Hoban and Borgers write:

Attacks on Ethereum 2.0 are easier to scale than attacks on Ethereum 1.0.

This is mainly because participating in Ethereum 2.0 is easier than Ethereum 1.0; users don't need as much hardware or electricity to participate in the network. They don't need more mining machines to launch an attack on the Ethereum network, but more ETH, and users can also get ETH in many markets. The report reads:

The boom in DeFi and the eventual switch to Ethereum 2.0 will greatly accelerate and amplify this trend.

Most blockchain watchers are already aware of the risks inherent in ethereum-based derivatives. For example, during the hack of bZx in February this year, the company lost hundreds of thousands of dollars.

While DeFi is already at risk on Ethereum 1.0, Borgers told Decrypt that he thinks this kind of derivatives attack "will only continue to expand with Ethereum 2.0, and so far we have not seen Ethereum 2.0 more than Ethereum 1.0." better address this attack vector."

In their analysis, Hoban and Borgers found that the network is most at risk during its transition to Ethereum 2.0. This is because at the beginning of the network transition, validators must lock up their staking ETH (and all rewards they receive for it) until the PoW chain is fully merged with the PoS chain. This reduces the liquidity of ETH, which the authors believe could lead to centralization of ETH.

Along the way, people may turn to centralized exchanges and derivatives trading. The author wrote:

“The high degree of centralization of validating nodes on these platforms creates centralization risk and unpredictability.” In other words, the more derivatives transactions, the more problems, at least as the network transitions.

Borgers told Decrypt that while certain types of attacks will become increasingly difficult, other attack vectors will emerge in addition to derivative attacks. As such, he supports "a slow rollout of Ethereum 2.0, giving developers time to test it out."

After the complete transformation of the Ethereum network, network security should rely on "three key variables: the amount of ETH staking, the price and volatility of ETH." Borgers explained that the current Ethereum network relies on computing power for its security, which is tied to the price of ETH.

In the paper's conclusion, the authors stated:

We pay more attention to the economic stability and security resilience of Ethereum 2.0 when the price of ETH is low. Declining profitability may force some validators to withdraw, further reducing the security of the network.

With fewer validating nodes, the cost of hacking the network also decreases. Hoban and Borgers calculated that the Ethereum network needs 13.8% of ETH as the bottom line for the network to be "sufficiently secure." To incentivize people to stake ETH on the network, they propose doubling the base reward from the currently planned 64 to 128, which would help increase user staking revenue.

Borgers told Decrypt:

The security of the network is highly dependent on the price of ETH and the amount of staking, we should ensure that there is enough ETH for staking, because this is the only variable we can really directly affect the security of the Ethereum 2.0 network.

Furthermore, adding economic incentives is affordable given that the security cost of a proof-of-stake network should actually be lower than that of Ethereum 1.0. Hoban and Borgers write:

We believe that the Ethereum network is paying too little in terms of security.DecryptMedia.comBorgers argued that transitioning to ethereum 2.0 is worth the “little extra bucks” from a security standpoint, and that it just requires some fine-tuning, saying: