Ronin Hack Demonstrates the Dangers of Increasing Centralization in DeFi

On March 29, it came to light that Axie Infinity’s Ronin bridge had fallen prey to a mammoth hack worth $625 million. According to reports, this has been one of the largest exploits to have emerged from the DeFi sector. However, what’s surprising is the fact that while the hack took place nearly a week prior, it was only discovered 72 hours ago.

 

Crazy it went unnoticed for 6 days

— zachxbt (@zachxbt) March 29, 2022

Additionally, Solana-based DeFi cross-bridge network Wormhole fell prey to a $320 million exploit earlier in January. As part of the scheme, nefarious third-party agents made their way with Wrapped Ethereum (wETH), a digital asset pegged to the price of Ethereum on a 1:1 ratio, worth the aforementioned sum.

How It All Went Down

As per an official statement, the breach took place when hackers were able to compromise Sky Mavis Ronin’s and Axie DAO’s validator nodes. This was done using illegally acquired private keys, which allowed the miscreants to forge fake withdrawals. The withdrawals resulted in 173,600 ETH and 25.5 million USDC being drained from the Ronin bridge in two transactions.

The hacker converted $25.5M $USDC to $ETH and scattered 6250 ETH to various wallets. Of these transfers, 1221 ETH was transferred to @FTX_Official  and @Cryptocom.  Nearly 175k ETH still remains at the hacker's address. The funds to launch this attack originated from @binance . pic.twitter.com/XZ9GpdBKJB

— SlowMist (@SlowMist_Team) March 29, 2022

Validator nodes are external entities whose purpose is to verify the information being circulated across a blockchain. The various validators operating within a network need to ensure with one another that the data being added to their ecosystem is accurate.

Rising Centralization Is a Cause for Major Concern. Here’s Why

One of the most highly touted aspects of blockchain, at least on paper, is its high-level decentralization. As a result, most crypto networks built using this technology are highly immune to third-party intrusions. However, in recent years, project creators have started to cut corners, in lieu of making their platforms faster, cheaper, and more efficient.

To put things into perspective, Ethereum’s network currently consists of 222,052 validators who work together to secure over 7 million ETH. This means that for any verification, voting, or record maintenance-related process to be approved, a majority of these validators have to agree with one another. That said, Sky Mavis’ Ronin bridge consists of just nine validator nodes. Therefore, to confirm a deposit/withdrawal event, only five of the nine validators need to sign off a transaction.

Binance Smart Chain, one of the world’s fastest-growing networks, is also plagued by such issues. This is because, despite the blockchain offering high transaction speeds and low gas fees, it compromises on the overall efficacy of its internal verification processes. To this point, the ecosystem relies on only 21 validators, making the system vulnerable — just like Ronin — to external threats.

Lastly, Cronos, a blockchain backed by popular digital asset exchange Crypto.com, too suffers from a lack of decentralization. To elaborate, the platform has just 20 validator nodes.

Looking Towards a Decentralized Future

As we head towards a financial landscape driven by crypto-enabled technologies, it is of utmost importance that the ethos of decentralization be given supreme importance. Otherwise, incidents such as the Ronin and Wormhole hack may continue to surface and keep budding investors from entering this burgeoning sector.