In a bid to address the increasing incidents of crypto hacks in the decentralized finance (DeFi) space, Diyahir Campos, a smart contract developer, has proposed a new Ethereum request for comment (ERC) standard known as ERC-7265, popularly called the “circuit breaker.” This proposal aims to establish a standardized approach for implementing a smart contract capable of halting suspiciously large token outflows from DeFi protocols.
According to Campos, if circuit breakers had been in place in 2022, they could have prevented billions of dollars in losses from DeFi protocols, with potential savings of up to 70% of the stolen funds. Last year witnessed a record-breaking $3.1 billion stolen from DeFi platforms, with cross-chain bridges accounting for 65% of the losses.
Campos, having experienced firsthand the loss of funds during the Euler Finance hack in March, which also affected several other protocols, recognized the need for an effective mechanism to prevent such incidents. By analyzing total value locked (TVL) charts and transactions, he questioned why protocols would allow 100% of their TVL to leave within seconds or blocks. Typically, daily usage involves around 20% of the TVL entering or leaving a project, and any significant deviation could indicate potential exploits.
However, the proposed circuit breaker has faced skepticism, with concerns raised about the potential misuse of such power by DeFi developers to freeze users’ funds indefinitely. Campos acknowledged these concerns and emphasized that the circuit breaker would be optional for DeFi projects, requiring a careful balance between user protection and minimizing false positives that could lead to unnecessary disruptions.
Campos collaborated with other developers, including Meir Banks, Philippe Dumonet, and Blagoj Dimovski, to shape the proposed standard. Inspired by circuit breakers used in traditional stock exchanges, the team aims to prevent hack losses rather than calming DeFi markets.
While circuit breakers offer an innovative approach to enhance DeFi protocol security, they may not address internal rug pulls, as they can be deactivated by the controlling team. Despite ongoing discussions and refinements, Campos expects the circuit breaker standard to be ready for integration into protocols within a few months, potentially reducing the impact of future hacks and bolstering investor confidence in the DeFi ecosystem.