DeFi has its many advantages, likewise some disadvantages as well. The present rise of frequent attacks on the space is something users are worried about. The current attacks reveal that the technology is somewhat vulnerable to some unwanted attacks.

Hackers are not just going for ransomware; they are also notorious for creating deliberate flash loan attacks which leads to loss of funds. There is a considerable possibility that Wrap Finance’s recent loss of money could be due to a flash loan attack by hackers. The unknown cyber criminals compromised the protocol, where assets worth millions of dollars are kept.

Wrap Finance suffer the loss of $7.7 million

The DeFi protocol, Wrap Finance, suffered an unexpected flash loan attack when the people behind the attack initiated the flash loan to perpetrate their crime. The many features DeFi promises led to interest by numerous investors who locked their money in different protocols in the DeFi space.

The hackers have exploited the billions sealed in the protocol and have seen the vulnerability of the platform to access more funds. Unfortunately, new projects are not safe in the hands of these criminals, and Wrap Finance is their latest victim.

The platform operates by allowing investors to keep their digital assets sealed in exchange for stablecoins. Interestingly, the hackers compromised the software to allow borrowing worth more than the collateral left behind. The complex flash loan attack was described as unusual and has made the platform lose a lot of money.

Wrap Finance shared the unfortunate incident to the public and explained that the hackers made away with $7.7 million worth of stablecoin. However, the Finance security team maintained that $5.5 million out of the money was still recoverable because it is secured in the collateral vault. The reassuring message has put some tension to rest, but it’s still unfortunate the company lost money.

Why protocols are vulnerable to flash loans

The recovery of the $5.5 million in stablecoin is not so sure, but the platform reported that if the discovery succeeds, the users will be refunded their $5.5 million. The team promised a gradual refund of the remaining $2.2 million which might not be recovered.

Now, looking at how different the flash loan is different from the regular loan in cryptocurrency. The regular crypto loans have sufficient collateral to back up the loan collected if the user defaults in payment. This is not the same with flash loans because the loan is expected to be paid immediately after, hence the ‘flash’ loan.

When the loan is not settled at the appropriate time, the contract between the lender and the borrower would be like it never happened. The loan has been applauded for its time effectiveness and convenience in the past few years.

Nevertheless, the lack of collateral in the contract made it vulnerable to hackers who are always looking for loopholes in technology to exploit. Even though DeFi platforms have overtime beefed up their securities to reduce the attacks, 2020 suffered so many flash loan attacks from the bad actors in the DeFi space.