WEBVTT - Can DeFi Survive the Hacks?

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<v Speaker 1>I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News,

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<v Speaker 1>and this is Bloomberg Crypto at Daily Bloomberg I Heart Podcast.

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<v Speaker 1>It's Thursday, June nine. In March, two hackers stole about

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<v Speaker 1>six million dollars from a crypto network. It was one

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<v Speaker 1>of the biggest exploits of this asset class to date

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<v Speaker 1>and left many investors shaken. Canada centralized financial system like

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<v Speaker 1>crypto work if investors get spooked whenever significant assets are lost. Today,

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<v Speaker 1>I'm joined by Bloomberg reporta Olga Karif and Bloomberg Opinion

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<v Speaker 1>columnist Parmi Olsen for a look at the scope and

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<v Speaker 1>effect that these attacks are having on the decentralized financial

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<v Speaker 1>market place. Olga Harmy, great to have you here, Thank

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<v Speaker 1>you both for joining, Thank you, thank you. So we're

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<v Speaker 1>going to start with just some basic principles or you know,

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<v Speaker 1>frankly crypto. I'm not sure anything ever is really basic,

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<v Speaker 1>but algo, we're going to talk about defy hacks. But

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<v Speaker 1>I want to start with when we say defy or

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<v Speaker 1>decentralized finance, especially as it relates to these hacks and

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<v Speaker 1>these exploits, what are we actually talking about. We all

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<v Speaker 1>know how we can use a bank or a broker

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<v Speaker 1>to make a trade or to take out a loan,

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<v Speaker 1>And what Defy is aiming to do is to do

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<v Speaker 1>the same thing, but without this intermediary such as a bank.

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<v Speaker 1>So Defy uses computer code to essentially allow you to

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<v Speaker 1>do all of the same things. Um, and this computer

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<v Speaker 1>code can get pretty complicated, so I would be I mean,

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<v Speaker 1>are you saying I'm borrowing money from a robot? No,

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<v Speaker 1>you are borrowing money from another person using the same

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<v Speaker 1>Defy app. Got it. So what this computer code is

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<v Speaker 1>doing is matching borrowers and lenders without there being like

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<v Speaker 1>a city bank or a Bank of America or somebody

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<v Speaker 1>like that in between. Exactly exactly, And what makes these

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<v Speaker 1>prone to the kinds of hacks that we've seen. We're talking,

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<v Speaker 1>you know, six million dollars, five hundred million dollars. Why

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<v Speaker 1>are these things happening and who are some of the

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<v Speaker 1>folks being affected by them? Exactly? The numbers have been

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<v Speaker 1>staggering and the users are affected. So it's very often

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<v Speaker 1>who's affected is just the user for trying to do

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<v Speaker 1>lending or borrowing or trading directly with each other, and

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<v Speaker 1>the reason this hacks happen is that to avoid using

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<v Speaker 1>an intermediary, essentially the computer code governing this apps has

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<v Speaker 1>to get pretty complicated and it's very hard to audited

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<v Speaker 1>and to make sure there are no bugs, that it's

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<v Speaker 1>functioning properly. Uh In Plus the various defy apps that

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<v Speaker 1>are out there, they're intertwined with each other and they're

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<v Speaker 1>governed by communities of users very often, and there are

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<v Speaker 1>so many different sort of new ways for hackers to

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<v Speaker 1>try and steal steal funds. And you know, when you

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<v Speaker 1>say the sums are being very large, I think in

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<v Speaker 1>your reporting you mentioned that something like two point three

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<v Speaker 1>billion dollars was stolen from these de five platforms, in

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<v Speaker 1>which is a more than one thousand percent increase in

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<v Speaker 1>the year before. And we're in two and we're probably

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<v Speaker 1>already at that and we're only in you know, the

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<v Speaker 1>middle of the year. Absolutely so so, just so far

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<v Speaker 1>this year, just two hacks of ronan Bridge and wormhole Bridge,

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<v Speaker 1>they have added up to almost a billion dollars. And

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<v Speaker 1>you know, PARTI I would love to get your perspective

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<v Speaker 1>on in any other I guess financial market asset class.

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<v Speaker 1>If people were just you know, losing a billion dollars

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<v Speaker 1>at a time that would worry someone. Oh absolutely, I

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<v Speaker 1>think right now with what's happening to the price of

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<v Speaker 1>bitcoin and other crypto assets, essentially they're falling. It's kind

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<v Speaker 1>of hard to pinpoint whether that is any of that

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<v Speaker 1>can be attributed to concerns about the security of these

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<v Speaker 1>DeFi services, because there's this broader sell off happening in

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<v Speaker 1>tech at the moment. It's affecting a whole lot of

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<v Speaker 1>big text stocks. But I do wonder, you know, I'm

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<v Speaker 1>thinking about the people who are investing in these kinds

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<v Speaker 1>of services and the people who end up losing money,

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<v Speaker 1>And you know, you could argue that this is ultimately

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<v Speaker 1>just the rough path that decentralized financial services UM have

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<v Speaker 1>to go to through to become more secure. I thought

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<v Speaker 1>it was really telling UM with this one hack against

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<v Speaker 1>a bridge service called Wormhole, and the developers from that

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<v Speaker 1>service actually reached out to the hacker that robbed them

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<v Speaker 1>and offered them ten million dollars as bounty in exchange

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<v Speaker 1>for all the funds, of course, but also to figure

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<v Speaker 1>out all the details on how they hacked the system.

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<v Speaker 1>So you know, it's it's like they want justice but

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<v Speaker 1>almost more than that, they want to learn how to

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<v Speaker 1>be more secure. So I think this is the kind

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<v Speaker 1>of wild West that UM entrepreneurs are operating in and

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<v Speaker 1>investors are who are going into this. They're you know,

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<v Speaker 1>they're like pioneers of the wild West, and and with

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<v Speaker 1>that adventure is going to come a lot of risk.

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<v Speaker 1>One thing I would note is, you know, the early

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<v Speaker 1>days of banking were also chaotic. You did not necessarily

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<v Speaker 1>have the regulatory framework that you have right now. You know,

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<v Speaker 1>even f D I C insurance, which in the US

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<v Speaker 1>is the idea that if your bank goes under for

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<v Speaker 1>some reason and you have up to two fifty thou

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<v Speaker 1>dollars in it, the government will attempt to make you whole.

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<v Speaker 1>Like that number that two dollars was increased as a

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<v Speaker 1>result of the two thousand and eight Final Crisis, when

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<v Speaker 1>you know, suddenly the reality that major banks could go

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<v Speaker 1>under became a clear and present danger as opposed to

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<v Speaker 1>theoretical one. So we're always kind of dealing with this

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<v Speaker 1>idea of vulnerabilities in the financial system. And although I'm wondering,

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<v Speaker 1>are you seeing anything that is potentially going to make

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<v Speaker 1>defy less vulnerable or are we way way way off

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<v Speaker 1>from that. I feel that we are ways away from that.

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<v Speaker 1>You would think that all of these apps would learn

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<v Speaker 1>from what happened to them and you know, build more

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<v Speaker 1>secure and robust systems. But if you look at a

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<v Speaker 1>lot of the DeFi hacks that have happened, and I'm thinking,

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<v Speaker 1>you know, Cream five, for instance, it got essentially hacked

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<v Speaker 1>in the same way three times last year. Uh you know,

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<v Speaker 1>it's the same people got hacked three time. Yeah, in

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<v Speaker 1>the same way through so called sort of flash loans.

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<v Speaker 1>This is where, uh you the hacker would borrow money

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<v Speaker 1>and return it in sort of the same transaction, if

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<v Speaker 1>you will. And so you know, when you look at

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<v Speaker 1>this sort of things, you start to wonder. But of course,

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<v Speaker 1>the industry is doing a lot to fix this problem.

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<v Speaker 1>So a lot of different startups have sprung up that

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<v Speaker 1>do code auditing of DEFY projects. They try to find

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<v Speaker 1>different bugs and prevent hacks. But some of the projects

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<v Speaker 1>that got hacked last year, they were audited and the

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<v Speaker 1>auditors missed the bugs that eventually led to the hack.

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<v Speaker 1>So nothing, you know, no system is perfect. And I

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<v Speaker 1>think the main issues that if you want to displace intermediaries,

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<v Speaker 1>the computer code has to get very very complex and

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<v Speaker 1>to the point where it's just really hard to find

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<v Speaker 1>all the bugs in it. And I think this is

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<v Speaker 1>sort of the main problem that this industry is grappling with.

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<v Speaker 1>You know, it's just is set up in a way

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<v Speaker 1>that makes it more vulnerable to hackers than a lot

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<v Speaker 1>of other services. Party you wrote in one of your columns,

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<v Speaker 1>you know, I think it may have been in January

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<v Speaker 1>that this exact thing that Olga is describing it seems

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<v Speaker 1>to undermine the idea that Web three, or what we

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<v Speaker 1>like to call Web three, is necessarily an improvement on

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<v Speaker 1>Web two. Can you talk a little bit more about that. Yeah,

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<v Speaker 1>And I actually really want to reiterate the point that

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<v Speaker 1>Olga made about the complexity of the code underpinning a

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<v Speaker 1>lot of these services. And this is what I've also

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<v Speaker 1>heard from entrepreneurs who work on Web three services, which is,

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<v Speaker 1>for example, that the pro one of the very popular

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<v Speaker 1>programming languages used to make these apps UM called what

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<v Speaker 1>is called solidity. It's a very very complex form of programming.

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<v Speaker 1>It's very rigid and brittle, so UM coders, for instance,

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<v Speaker 1>you know, when you're building a Web two app, you

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<v Speaker 1>and write your code and then you can try it.

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<v Speaker 1>You've got lots of different opportunities to let it go

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<v Speaker 1>wrong and see where you went wrong, and then go

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<v Speaker 1>back and do it again. You can't really do that

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<v Speaker 1>as much with Web three services. You don't get multiple

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<v Speaker 1>tries to get something right. You have to plot your

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<v Speaker 1>steps out really carefully. UM and you know, something so

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<v Speaker 1>simple as a typo UH could potentially lead to a

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<v Speaker 1>security vulnerability, not just a glitch, but an actual vulnerability.

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<v Speaker 1>UM and I think what again, what makes this different

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<v Speaker 1>to Web two is that these aren't just UM services

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<v Speaker 1>for social networking or games or anything like that, but

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<v Speaker 1>UM people are actually storing large sums of money and

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<v Speaker 1>so if it if there's a security breach, it has

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<v Speaker 1>massive financial repercussions. And one thing, one other point that

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<v Speaker 1>was made to me by an entrepreneur recently, was there's

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<v Speaker 1>a really prevailing move fast and break things culture within

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<v Speaker 1>Web three. Well, yeah, us in Web two by Facebook exactly,

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<v Speaker 1>but more so now in Web three than with then

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<v Speaker 1>with Web two, which has become much more corporate and

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<v Speaker 1>very standardized and very very regulated or not as regulated

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<v Speaker 1>perhaps as it should be, but certainly much more than

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<v Speaker 1>UM blockchain services. UM and that just really um it

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<v Speaker 1>does not reconcile with the fact that there's so much

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<v Speaker 1>at stake financially when these services are breached. Back in

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<v Speaker 1>a moment with more from Olga Karif and Parmi Olson.

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<v Speaker 1>So this web two Web three conflation, before we go

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<v Speaker 1>too far, I want to just talk a little bit

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<v Speaker 1>more about how those things are different, because I also

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<v Speaker 1>think it's related to you know, Olga's point about defy

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<v Speaker 1>and and the point you are also making about complexity.

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<v Speaker 1>When we think about Web two, we're talking about companies

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<v Speaker 1>like you know, Facebook and social networking, or Spotify and music,

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<v Speaker 1>or Amazon and purchases, or Evay and purchases. When we're

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<v Speaker 1>talking about Web three, what are we actually saying. So

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<v Speaker 1>with Web three, we're talking about services that often use

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<v Speaker 1>coins for incentives. For example, we're talking about services that

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<v Speaker 1>typically run on blockchains, which are digital ledgers that support

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<v Speaker 1>those coins, and very often we are talking about just

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<v Speaker 1>a very different organizational structure. So a lot of these

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<v Speaker 1>apps are created by communities of users or supported by

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<v Speaker 1>their communities of users, and so uh, you know, in

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<v Speaker 1>many ways, the idea behind Web three is sort of

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<v Speaker 1>giving power to the people, taking power away from corporations

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<v Speaker 1>and giving it giving more of it to the people.

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<v Speaker 1>But in practice the power is still largely concentrated and

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<v Speaker 1>people who had power before, right, if if I'm understanding

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<v Speaker 1>it correctly, a lot of the folks who are making

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<v Speaker 1>money in Web three are the people who made a

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<v Speaker 1>ton of money in Web two, and as a result,

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<v Speaker 1>are you know, very well positioned to be informing those decisions. Absolutely,

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<v Speaker 1>and basically the people who are emerging as powerhouses and

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<v Speaker 1>Web three are venture capitalists who were also big investors

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<v Speaker 1>in Web two's and very heavily influenced a lot of

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<v Speaker 1>the decisions as well as coin prices Party August talking

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<v Speaker 1>about coin prices, right, I mean, there's a there's sort

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<v Speaker 1>of a phrase that is used both ironically and non

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<v Speaker 1>ironically in crypto about the idea of magic Internet money

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<v Speaker 1>and that none of these valuations really mean anything. Can

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<v Speaker 1>you just give me a little bit of a sense

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<v Speaker 1>of when people say, like this hack is seven hundred

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<v Speaker 1>million dollars or this company is valued at x y z,

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<v Speaker 1>what are they basing these things on? Well, as I

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<v Speaker 1>understand it, they're basing it on the value of a

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<v Speaker 1>particular cryptocurrency in that moment so something like a hundred

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<v Speaker 1>twenty thousand ether or wrapped ether as it was when

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<v Speaker 1>it was being transferred through a bridge, was worth three

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<v Speaker 1>d and twenty million dollars in US dollars um. But

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<v Speaker 1>of course that number can change all the time. And

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<v Speaker 1>somebody who's been covering this for longer than most people,

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<v Speaker 1>let's just say, um, and you you know so many

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<v Speaker 1>of the people in the space, and you've watched the

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<v Speaker 1>rise and fall and rise and fall of various things.

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<v Speaker 1>Is there anything about this year and the hacks that

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<v Speaker 1>we've seen, or the sizes that we've seen, the complexity

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<v Speaker 1>that you've both described, that has surprised you in any way?

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<v Speaker 1>You know? Um, I don't think it's surprising that we

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<v Speaker 1>are seeing more of this hacks. Uh. It just uh

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<v Speaker 1>more people are realizing that crypto, you know, is big,

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<v Speaker 1>and it's going to be probably bigger at some point. Uh.

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<v Speaker 1>And so there are more users and more money moving

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<v Speaker 1>into this space, and of course the hackers are following

0:13:59.520 --> 0:14:02.600
<v Speaker 1>the money, and so that's why we are seeing so much,

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<v Speaker 1>so much activity. It seems like almost every week some

0:14:06.480 --> 0:14:10.760
<v Speaker 1>hack happens. But but I think the bottom line here

0:14:10.800 --> 0:14:13.480
<v Speaker 1>in some ways is that a lot of money, A

0:14:13.480 --> 0:14:17.080
<v Speaker 1>lot of smart people are going into this space, and uh,

0:14:17.280 --> 0:14:20.760
<v Speaker 1>there are a lot of issues, but also with you know,

0:14:20.880 --> 0:14:24.160
<v Speaker 1>so much money and so much bring power going in,

0:14:24.680 --> 0:14:28.080
<v Speaker 1>things will get worked out. That's a lot of the

0:14:28.120 --> 0:14:33.640
<v Speaker 1>people I talked to feel this way. And part me

0:14:33.920 --> 0:14:36.360
<v Speaker 1>just going back to your point about how Web two

0:14:36.360 --> 0:14:38.520
<v Speaker 1>and Web three are the same. One of the big

0:14:38.560 --> 0:14:41.760
<v Speaker 1>ways in which they're different, or at least perceived as difference,

0:14:41.800 --> 0:14:43.840
<v Speaker 1>is that in general and Web two, you knew who

0:14:43.840 --> 0:14:45.720
<v Speaker 1>the people on the other side of a transaction were,

0:14:46.280 --> 0:14:48.400
<v Speaker 1>or you kind of knew who the company was, and

0:14:48.520 --> 0:14:51.480
<v Speaker 1>you you may know who their exacts were. In Web three,

0:14:51.640 --> 0:14:54.680
<v Speaker 1>you might be borrowing or lending on a protocol that's

0:14:54.720 --> 0:14:57.560
<v Speaker 1>written by, you know, surely very smart, but fifty and

0:14:57.600 --> 0:15:00.000
<v Speaker 1>mostly anonymous people who uploaded some stuff to get help

0:15:00.640 --> 0:15:02.880
<v Speaker 1>and and had some get and had some code review.

0:15:03.240 --> 0:15:04.960
<v Speaker 1>And everybody's like that seems great, but you have no

0:15:05.000 --> 0:15:08.600
<v Speaker 1>idea who they are. Does this pervasive anonymity affect any

0:15:08.600 --> 0:15:13.800
<v Speaker 1>of your analyses? Yeah, I think it's really um disconcerting.

0:15:13.960 --> 0:15:17.520
<v Speaker 1>I mean I would be disturbed by that if I

0:15:17.600 --> 0:15:20.160
<v Speaker 1>was an investor or someone who was putting my money

0:15:20.480 --> 0:15:23.240
<v Speaker 1>in these services. And I even just as a journalist,

0:15:23.360 --> 0:15:27.840
<v Speaker 1>like when you are looking at these companies websites or

0:15:27.880 --> 0:15:30.840
<v Speaker 1>their blog posts, and I remember reading one blog post

0:15:30.840 --> 0:15:33.480
<v Speaker 1>from a company that was describing what happened after they

0:15:33.520 --> 0:15:35.800
<v Speaker 1>had a hack and they had this kind of war

0:15:35.920 --> 0:15:39.080
<v Speaker 1>room conference call within an hour, which was pretty impressive

0:15:39.120 --> 0:15:42.080
<v Speaker 1>after the breach had happened, UM, and they were describing

0:15:42.120 --> 0:15:44.440
<v Speaker 1>the different UM types of people. There was like an

0:15:44.480 --> 0:15:48.440
<v Speaker 1>auditor and UM there were these different the validators but

0:15:48.600 --> 0:15:52.000
<v Speaker 1>no names, you know, And it's just kind of weird

0:15:52.040 --> 0:15:55.359
<v Speaker 1>to me that it's kind of these beast faceless organizations

0:15:55.360 --> 0:15:57.480
<v Speaker 1>are handling so much money, and I know that there

0:15:57.480 --> 0:16:01.000
<v Speaker 1>are names put to UM behind the man of some

0:16:01.080 --> 0:16:04.800
<v Speaker 1>of them, particularly the well known ones. UM. But I

0:16:04.840 --> 0:16:09.040
<v Speaker 1>think the anonymity, particularly as this industry matures, is really

0:16:09.040 --> 0:16:12.560
<v Speaker 1>going to have to change and UM, especially when money

0:16:12.640 --> 0:16:15.720
<v Speaker 1>is being lost, people need to be accountable, right, And

0:16:15.840 --> 0:16:18.440
<v Speaker 1>you know that that idea of people being accountable always

0:16:18.440 --> 0:16:21.160
<v Speaker 1>strikes me as so fascinating, which is that when everything

0:16:21.240 --> 0:16:24.520
<v Speaker 1>is going well, anonymity seems to be fine. Right, people

0:16:24.520 --> 0:16:25.840
<v Speaker 1>are like this is great. We don't need to know

0:16:25.840 --> 0:16:27.920
<v Speaker 1>who these people are that would be disrespectful of their

0:16:27.920 --> 0:16:30.800
<v Speaker 1>talents or whatever, and then as soon as anything falls

0:16:30.840 --> 0:16:33.040
<v Speaker 1>over there, like somebody called the police and have someone arrested,

0:16:33.040 --> 0:16:35.320
<v Speaker 1>but like you can't arrest a faceless entity and you

0:16:35.520 --> 0:16:38.920
<v Speaker 1>can't arrest a computer program. So you know, there's definitely

0:16:38.920 --> 0:16:42.200
<v Speaker 1>a disconnect between those competing desires. Yeah, and I mean

0:16:42.280 --> 0:16:45.520
<v Speaker 1>even like I'm still kind of trying to wrap my

0:16:45.520 --> 0:16:48.760
<v Speaker 1>head around how some of these systems work. But for example,

0:16:49.240 --> 0:16:53.040
<v Speaker 1>when you're doing transactions on certain networks, you have these

0:16:53.160 --> 0:16:56.400
<v Speaker 1>validator nodes and the validators or like these computers with

0:16:56.480 --> 0:17:01.360
<v Speaker 1>a human behind them, and UM, after one one big hack,

0:17:01.440 --> 0:17:04.440
<v Speaker 1>one of the companies UM behind it said, oh, we're

0:17:04.440 --> 0:17:07.000
<v Speaker 1>going to increase the number of validators from five to

0:17:07.040 --> 0:17:09.560
<v Speaker 1>twenty one. But again, like we don't know who these

0:17:09.640 --> 0:17:13.679
<v Speaker 1>validators are UM, and so it's very hard again to

0:17:13.720 --> 0:17:16.639
<v Speaker 1>hold people to account. So that's that's probably going to

0:17:16.720 --> 0:17:19.480
<v Speaker 1>be a culture shift that defied companies are going to

0:17:19.560 --> 0:17:22.240
<v Speaker 1>have to go through. Well, word to the wise, do

0:17:22.400 --> 0:17:25.639
<v Speaker 1>your research. Thank you Parmy, and thank you Olga. It

0:17:25.640 --> 0:17:27.040
<v Speaker 1>has been a real pleasure to have you here with

0:17:27.119 --> 0:17:31.840
<v Speaker 1>us today. Thanks for having me. Thank you. You can

0:17:31.880 --> 0:17:34.560
<v Speaker 1>find more of Olga's and parties reporting on the Bloomberg

0:17:34.680 --> 0:17:37.800
<v Speaker 1>terminal on Bloomberg dot com and follow them on Twitter

0:17:38.000 --> 0:17:44.240
<v Speaker 1>at Olga Karif and at Parmi. On the next episode

0:17:44.240 --> 0:17:49.280
<v Speaker 1>of Bloomberg Crypto. In January, the United Kingdom officially withdrew

0:17:49.359 --> 0:17:52.960
<v Speaker 1>from the European Union. The fallout from Brexit, as we

0:17:53.000 --> 0:17:55.719
<v Speaker 1>all came to know it, is still being measured across

0:17:55.720 --> 0:17:59.680
<v Speaker 1>all industries. Some analysts predict it will take years to

0:18:00.040 --> 0:18:03.480
<v Speaker 1>understand the full impact of this event on the UK economy.

0:18:04.240 --> 0:18:07.560
<v Speaker 1>Brexit even affected the crypto market, especially as far as

0:18:07.640 --> 0:18:12.160
<v Speaker 1>regulations are concerned. Bloomberg reporter to Emily Nicole sees cautious

0:18:12.160 --> 0:18:16.040
<v Speaker 1>optimism among investors about the UK's approach to crypto regulation.

0:18:16.640 --> 0:18:22.120
<v Speaker 1>She joins me tomorrow, I'm Stacy Marie Ishmael and this

0:18:22.200 --> 0:18:25.359
<v Speaker 1>is Bloomberg Crypto, a daily podcast from Bloomberg and I

0:18:25.480 --> 0:18:29.160
<v Speaker 1>Heart Radio. For more shows from I Heeart Radio, visit

0:18:29.200 --> 0:18:32.600
<v Speaker 1>the iHeart Radio app, Apple Podcasts, or wherever you get

0:18:32.640 --> 0:18:36.920
<v Speaker 1>your podcasts. Email your comments, questions or suggestions to Crypto

0:18:36.960 --> 0:18:40.520
<v Speaker 1>at Bloomberg dot net. Follow us on Twitter at Crypto.

0:18:42.800 --> 0:18:45.480
<v Speaker 1>The supervising producer and editor of this episode is Vicky

0:18:45.600 --> 0:18:49.520
<v Speaker 1>ver Galina. Our producer is Mohammed faruk Zan Absdiki is

0:18:49.520 --> 0:18:52.520
<v Speaker 1>our associate producer. Des To wonder At is our engineer.

0:18:52.800 --> 0:18:56.240
<v Speaker 1>Original music by Leo Sidron. Bloomberg's head of podcasts is

0:18:56.240 --> 0:19:08.200
<v Speaker 1>Francesca Levy n T. The Stablish It and Its Bad

0:19:08.280 --> 0:19:09.359
<v Speaker 1>in the sid