Beyond the Hacks: How DeFi Can Mature Through Disaster Preparedness

Despite the numerous exploits in DeFi that have drained user funds, it's surprising how many platforms still scramble to implement disaster recovery plans only after attacks occur, rather than proactively putting procedures in place. It's also concerning how rarely everyday users think to ask about continuity protocols when assessing DeFi platforms, often only voicing concerns after it's too late.

This article aims to change that status quo. I argue that DeFi founders need to prioritize building in disaster preparedness from the ground up, rather than treating it as an afterthought. Users should also start demanding battle-tested continuity plans before trusting platforms with their hard-earned assets.

My goal is to push the DeFi space to mature when it comes to risk management and operating resilient infrastructure. Proactive disaster recovery needs to become the norm. This article represents my perspective on what's needed for DeFi to evolve into the trusted financial foundation so many envision.

The past few years have unleashed innovation at a breakneck pace. Exciting new platforms have disrupted traditional financial products by offering accessible, transparent, and permissionless alternatives using blockchain technology. However, in its race to move fast and break things, we have also seen its fair share of exploits, hacks, and disasters.

As disruptors and innovators aim to mature into a trusted infrastructure for the financial system, it’s time for leading platforms to adopt the disaster recovery type of practices that traditional financial institutions employ. Implementing continuity plans and safeguards will not only help regain user trust when things go wrong but also instill confidence in the reliability of these disruptive applications before disaster strikes.

Traditional financial institutions have experienced and dealt with their share of issues, which is where we can learn from.

The Startup Accountability Gap

The mantra of "move fast and break things" has led to incredible innovation, but also unintended consequences around accountability. In the rush to rapidly build and ship products, many startups focus solely on growth at the expense of other considerations.

The cop-out that "we're just a small startup trying to change the world" or "we'll worry about that later" can no longer apply as these firms scale to millions of users and manage sensitive data or finances. Yes, perfection is unattainable and over-planning stifles innovation. But a balanced approach is needed.

Users don't differentiate between a 100-person startup or a Fortune 500 company when trusting these platforms with their information, assets, and rights. The bar for acting responsibly should be high regardless of size and resources. Proactive planning to safeguard users and prevent disasters must be ingrained into startup DNA early on.

The most disruptive startups will learn that accountability, trust, and safety can be competitive advantages that cement loyalty. Those refusing to grow up because they prioritized unchecked growth above all else will soon find users migrating to more reliable options. You can move fast without compromising integrity - great companies will figure out how.

Don’t Wait Until It’s Too Late

Disaster recovery is an afterthought only implemented post-crisis. Platform founders believe that hackers are inevitable but manageable, or that their protocol is not prominent enough yet to warrant precautionary measures. However, this reactive strategy causes severe - often existential - damage when exploits do occur.

Though each disaster brings unique challenges, DeFi platforms need continuity plans outlining processes to quickly detect, respond, communicate, recover, and learn from exploits.

Prior incidents demonstrated similar attack vectors that prudent disaster planning may have mitigated or prepared for more effectively. Hacks exploiting flash loan and price oracle manipulations specifically have repeatedly plagued projects across the board. The mantra of “move fast and break things” cannot apply to financial infrastructure managing billions in funds.

Specific Disaster Recovery Examples

Platforms should have detailed playbooks for the recovery processes outlined above. Here are some specific protocols DeFi platforms could implement:

• Asset Freeze Capabilities - Have direct lines of contact with exchanges, bridges, liquidity pools, and other DeFi protocols to quickly freeze, recall, or blacklist lost funds before they are washed through decentralized networks.
• Incident Response Teams - Maintain relationships with internal or external cybersecurity forensics experts that can trace stolen funds and identify vulnerabilities exploited by attackers.
• Emergency Communications - Have templates prepared for status updates across social media, emails, notifications, and press releases to promptly get ahead of crises and control the narrative.
• Liquidity Reserves - Maintain adequate reserves of liquidity out of protocol circulation that can be deployed in case of bank run-type scenarios during loss of confidence.
• Automated Disaster Testing - Routinely simulate different attack scenarios such as flash loan exploits, oracle manipulations, governance takeovers, etc to audit and improve incident response.
• Backup Infrastructure - Have redundant versions of core systems that can be spun up in case primary applications are taken offline during recovery.

Questions Users Should Ask Platforms About

When assessing DeFi platforms, users should proactively ask projects about their continuity plans for exploits:

• Is there a documented incident response plan in case of a hack or failure?
• Which personnel are involved in disaster scenarios? Are their roles and responsibilities clearly defined?
• What are the procedures to communicate with users and external stakeholders during crises?
• How will lost funds be tracked and potentially frozen or recovered?
• What contingencies are in place to avoid or manage liquidity crises?
• Are failover infrastructure and backups ready in case of systems disruptions?
• How are disaster recovery procedures regularly tested through simulations?
• Does the project maintain relationships with forensic experts, law enforcement, and insurers?
• Could exploited users be reimbursed through insurance or pooled funds?
• How will response plans evolve to prevent repeat incidents in the future?

Asking these questions not only identifies preparedness levels but also signals to the industry that battle-tested continuity is valued and expected of all platforms before onboarding.

Prioritize Continuity From the Start

For early-stage DeFi entrepreneurs, disaster recovery may feel premature before attaining product-market fit and significant assets under management. But implementing continuity processes upfront establishes operational discipline and thoughtful design, setting the stage for stability at scale.

Projects should devote time to planning incident response frameworks from inception through launch, routinely testing and updating them as the platform grows. Bolstering security engineering, auditing, and infrastructure redundancy should be budgeted as non-negotiable priorities, not afterthoughts.

Moreover, documenting disaster preparedness measures can provide assurance to investors, partners, and enterprise clients during onboarding. Mature continuity planning may incentivize large fund allocations that value safety.

Standardized Recovery Frameworks

While every DeFi firm will require a tailored strategy based on its technology stack and risk profile, standardized frameworks should be developed. Common security models, crisis management playbooks, and compliance procedures will allow the industry to adapt best practices across applications.

Trade groups like the DeFi Security Alliance have started establishing security label certifications, security scoring frameworks, and open cybersecurity standards. These guidelines give projects a starting point to build upon rather than reinventing the wheel each time. Initiatives like samczsun's 911 Seal bring together security experts such as:

@0xOhm_eth, @DanielVF (Origin Protocol), @FrankResearcher (Wintermute), @GNSPS (ConsenSys Diligence), @MatthiasEgli (ChainSecurity), @Montyly (Trail of Bits), @Mudit__Gupta (Polygon), @NotDeGhost (OtterSec), @YSmaragdakis (Dedaub), @brian_pak (ChainLight), @emilianobonassi (Researcher), @ethzed (Sigma Prime), @invlpgtbl (Hexagate), @pcaversaccio (Researcher), @ret2jazzy (Zellic), @samczsun (Paradigm), @sniko_ (MetaMask), @storming0x (Yearn), @tayvano (ConsenSys)

to collaborate on attack response policies that balance transparency and protecting users. As blockchain security firms like BlockSec, it's a natural duty to protect users' assets and safeguard the web3 world for its long-lasting prosperity. BlockSec's attack alert policy carefully constructs procedures to provide enough information to alert the community while preventing abuse. Monitoring affected protocols, assisting with inquiries, releasing analysis once contracts are secured, and calling for community coordination can promote responsiveness. Carefully constructed attack alert procedures can promote community coordination

In addition, consulting firms focusing on crypto resiliency are emerging to help projects implement continuity programs in the face of opaque regulatory obligations. As attacks escalate, demand for these services will grow.

Think Like TradFi, But Better

In many ways, the decentralized ethos of “we’re not like the old financial system” has led DeFi to eschew the operational controls and risk management processes that traditional finance (TradFi) relies on.

But dismissing the diligence and continuity planning of TradFi is a mistake. Institutions spend years structuring detailed plans tailored to their businesses, which are continuously updated and simulated under different failure scenarios.

That said, DeFi continuity plans require even greater rigor. The complexity and speed of smart contracts make them susceptible to unforeseen exploits not seen in conventional software. And decentralized governance means execution depends on coordinating stakeholders rather than centralized leadership.

By combining diligent continuity planning with blockchain’s unique strengths of transparency, redundancy, and cryptographic integrity, DeFi can build something both novel and resilient. But it requires treating risk management as a first-class priority today, not an afterthought.

The DeFi space is still young and learning. But users expect their funds and data to be handled with the same care as traditional finance. Developing institutional-grade continuity practices is a must, before the next big hack hits. The wild west days of DeFi are over - it’s time to start acting like the bedrock of the financial system many expect it to be.