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Understanding ERC 7265: Will it Put an End to DeFi Hacks?

Last Updated March 4, 2024 2:03 PM
Teuta Franjkovic
Last Updated March 4, 2024 2:03 PM
Key Takeaways
  • The Ethereum community suggests using a “Circuit Breaker” to guard against significant token outflows and potential hacks on DeFi protocols
  • DeFi investors could save millions of dollars by using ERC 7265, but its flaws should be taken into account
  • DeFi exploits are almost impossible to prevent because no protocol is 100% reliable and completely

A new standard dubbed ERC 7265 that members of the Ethereum community have developed is intended to increase the security of decentralized finance (DeFi) protocols and reduce attacks.

Allowing Flexibility and Accurate Internal Accounting

ERC 7265 (or “Circuit Breaker”), developed by a team that includes Fluid Protocol founder Meir Bank, Dereg founder Phillipe Dumonet, and Hydrogen Labs smart contract developer Diyahir Campos, is intended to slow down or stop withdrawals from DeFi protocols when they surpass a predetermined level.

According to one of the standard’s developers, the proposed standard , known as ERC (Ethereum Request for Comments) 7265, would enable a “circuit breaker,” allowing DeFi protocols to easily incorporate a back-stop in their smart contracts that prevents tokens before they leave the contracts in the event of a hack.

According to the proposal:

“This standard outlines a smart contract interface for a Circuit Breaker that triggers a temporary halt on protocol-wide token outflows when a threshold is exceeded for a predefined metric.”

Developers would be able to define whether the circuit breaker contract should revert on attempted outflows or delay settlement and “temporarily custody outflows” during the cooldown period.

This allows developers flexibility and ensures accurate internal accounting for protocols.

Attacks on DeFi protocols are all too frequent and have cost users billions of dollars. A multi-chain TVL stats dashboard DeFiLlama reported  that approximately $6.6 billion had been taken so far through exploits, $5.31 billion of which went to DeFi protocol hackers.

The official system for making suggestions for enhancements to the Ethereum project is called ERC, which stands for “Ethereum Request for Comments.” The suggested improvement’s position in the line-up is indicated by the number 7265. ERC-4337, then, stands for “Ethereum network improvement number 7265.”

Circuit Breakers Aren’t Quick Remedy

In his blog post , Builder Diyahir stated that circuit breakers, or CBs, are not a panacea.

“No amount of audits, insurance, and white-hat hacker rewards will stop hackers from finding clever ways to extract value from a growing public honey pot. One line of code is the difference between working as intended and completely wrecked,” he wrote.

The most obvious justification for this claim is that ERC 7265 offers nothing to stop hacks, as the developer has pointed out. Exploiters may steal as much as the circuit breaker permits or execute slow-moving, subtle attacks. Another potential negative is that the ERC 7265 protocol may accidentally be activated depending on how the threshold is set. In the best-case scenario, the proposed norm, according to Diyahir, will simply reduce investor losses.

Extra Time to Safeguard Funds

When attacked, a protocol frequently loses everything and quickly reaches zero (TVL).

According to Fluid Protocol’s Meir Bank, most protocols don’t have enough response time to respond to a breach. It’s already too late by the time anyone even sees the problem.

At the same time, Diyahir says the attacks will still happen no matter what. However, he says, “the goal here is not to entirely end hacks but to extend the actionable period that the protocol has to address the situation.”

According to Bank, ERC 7265 would stop an attacker from stealing the entire contract while recovering the majority of the lost money.

Diyahir also said a circuit breaker should only be used for projects that are already upgradeable and do not increase centralization.

In short, by enabling customers to set up unique rate restrictions for each asset, implementing such a security improvement would safeguard DeFi protocols and make it more difficult for hackers to empty an entire contract in a matter of seconds. This might greatly reduce the amount of harm an attack would do.

Proposal Is Currently In the Early Stages

This is still only a proposed standard. Therefore, it needs to be approved by the Ethereum community before the core team can adopt it and put it into practice.

It will be, however, interesting to see if the core Ethereum team adopts and uses the ERC 7265 standard as the ultimate standard, given that it is only a proposed standard.

While Ethereum Improvement Proposals, or EIPs, are submitted updates and improvements to the Ethereum protocol itself, ERCs are proposed standards that specify how specific features or functionalities should be implemented on the Ethereum network. After being approved by the larger Ethereum community and deployed by core developers, ERCs and EIPs are finalized.

ETH Outlook

During the most recent cryptocurrency boom, Ethereum was unable to cross the critical $2,000 mark. As a result, it has started to retreat once more, currently up 1.06% on the day to $1,942.

The price of ETH appears to be falling back to the $1,900 support area soon. Ethereum does not seem to have the impetus for its own ascent despite positive fundamentals such as an increase in staking.

Additionally, it will probably remain in the background of Bitcoin. BTC has been correcting since hitting a peak in 2023 late last month.