Risks and Challenges in Crypto Lending

Risks of AI-Assisted Hacks

Crypto lending has seen a resurgence of interest after a dismal second quarter, with $11.33 billion leaving the sector in Q2 due to the Kelp DAO hack. However, the growth of lending value locked has also increased the honeypot, making it easier for hackers to exploit. Stani Kulechov, founder and CEO of Aave Labs, says that the problem is now top of mind. Aave now takes a more holistic approach to security, considering the wider view beyond smart contracts.

Assessing Protocol Risks

Users of lending protocols must judge how exposed a protocol is to external and internal risks. Thomas Wu, CFO of Bitcoin-backed lender Ledn, says that every wrapper, bridge, and oracle between the lender and the underlying asset is another place a loan can go wrong. Sid Powell, co-founder and CEO of crypto credit platform Maple, advises that serious lenders should assume a borrower can fail at any time and work backward from there.

Responding to Risks

DeFi lender Spark chief executive Sam MacPherson says that protocols must review governance design, operational security, collateral quality, liquidity management, and dependencies across the wider ecosystem. Spark began phasing out rsETH on SparkLend in January after assessing that its low usage and revenue did not justify the additional risk created by supporting it. Aave has introduced similar mechanisms, reviewing every asset quarterly and after any material change.

Human Error and Asset Deployment

Shawn Owen, founder and CEO of SALT Lending, warns that human error remains one of the biggest vulnerabilities. Assets deployed elsewhere to generate interest can also introduce additional risks. Crypto lenders learned this lesson the hard way during 2022's brutal market unwind, when lenders like Celsius, Voyager, and BlockFi imploded after taking on risks customers either didn't understand or weren't expecting.