Ethereum Community Proposes ‘Circuit Breaker’ to Safeguard DeFi Protocols Against Massive Token Outflows

Ethereum developers and members of the community have come together to propose a new token standard aimed at protecting decentralized finance (DeFi) protocols from potential hacks and exploits. The proposed ‘Circuit Breaker’ mechanism would act as a safeguard by temporarily halting significant token outflows from protocols.

Collaborating on Ethereum Request for Comments (ERC) 7265, the Ethereum community has outlined a smart contract interface for the Circuit Breaker. Once triggered, this mechanism would automatically pause the flow of tokens throughout the protocol if a predefined metric exceeds a set threshold.

Enhancing Security and Minimizing Losses for DeFi Protocols

The Circuit Breaker, as described by Ethereum developer ‘Philogy,’ acts as a precautionary measure, enabling developers to implement a backstop in their contracts to halt token outflows before they leave the contract in the event of a hack.

One of the key reasons for proposing this mechanism is the need for a faster response time to counteract hacks. Meir Bank from Fluid Protocol, who announced the ERC-7265 Circuit Breaker, noted that most protocols lack the necessary response time to react to an attack. By implementing the Circuit Breaker, the potential damage caused by hackers would be significantly reduced, with the possibility of recovering the majority of funds.

An analysis conducted by the research team revealed that the majority of DeFi protocols experience drawdowns of 25% to 40% in total value locked (TVL) only in the case of a hack. Bank further concluded that integrating ERC-7265 brings numerous advantages with minimal downsides for governed DeFi protocols.

Hacks and Exploits Continue to Plague the Market

DeFi has witnessed significant losses due to hacks and exploits, with more than $200 million lost in the second quarter of this year alone, according to the De.Fi Rekt report. The total value of lost funds in 2023, resulting from DeFi hacks and exploits, has already reached $667 million in the first half of the year.

In terms of Ethereum’s price outlook, the cryptocurrency has struggled to surpass the crucial $2,000 level in the recent crypto rally. As a result, it has begun to experience a slight pullback, currently trading at $1,936. In the short term, the price of ETH seems to be retracing towards the support zone of $1,900.

Despite positive factors such as increased staking activity, Ethereum appears to lack the momentum for an independent rally and is likely to remain overshadowed by Bitcoin. BTC, which recently reached its 2023 high, is currently undergoing a correction phase.

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