DeFi Risk Management: Systematic Framework and Innovative Thinking

Decentralized Finance ( DeFi ) has achieved a decentralized version of traditional financial services through smart contracts, covering multiple areas such as trading, lending, insurance, and derivatives. However, due to the automated nature of these protocols and the lack of centralized management, risk management has become a significant challenge faced by the industry.

The dual attributes of DeFi—finance and technology—bring multiple risks.

1. Code Risk: Involves code vulnerabilities at multiple levels, including the underlying blockchain, smart contracts, and wallets.

2. Business Risk: Arises from vulnerabilities in business design that may be exploited by attackers or arbitrageurs.

3. Market Volatility Risk: Issues arising from the lack of adequate risk mitigation mechanisms under extreme market conditions.

4. Oracle Risk: As a DeFi infrastructure, the security of oracles is directly related to the stability of the entire ecosystem.

5. "Technical Agency" Risk: Centralized interactive tools used by ordinary users may pose potential risks.

To address these challenges, we have proposed a comprehensive Decentralized Finance risk management framework, divided into three stages: before, during, and after.

Pre-management mainly includes rigorous formal verification of smart contracts, ensuring that the boundaries of each method, resource, and instruction are clear, and understanding their interrelationships. This approach, akin to mathematical proof, goes far beyond the scope of traditional software testing.

In-process management focuses on real-time risk control, including automatic shutdown mechanisms and anomaly trigger designs. These mechanisms can identify and intervene in potential attack behaviors while making real-time adjustments to unexpected situations.

Post-management involves multiple aspects: fixing code vulnerabilities through the Decentralized Autonomous Organization (DAO); considering contract forks in extreme cases; introducing insurance mechanisms to disperse risks; and using on-chain data to track losses.

The current understanding of DeFi security in the industry is still at a primitive stage, often limited to traditional thinking. To adapt to future developments, it is essential to introduce innovative concepts such as boundary definition, completeness analysis, consistency verification, formal verification, shutdown mechanisms, anomaly triggering, decentralized governance, and contract forking.

Only by adopting this systematic Risk Management framework and continuously innovating ways of thinking can DeFi fully realize its revolutionary potential while ensuring safety.