Decentralized finance (DeFi) protocols are proposed to add a ‘circuit breaker’ mechanism, specified with the ERC-7265 token standard. As a hack prevention, this mechanism stops the transfer of Ethereum tokens.
The growth of DeFi is huge, and it has become an essential part of the world cryptocurrency markets. However, it’s completely based on technology security against possible attacks to expand. Until now, DeFi protocols have lost over $5 billion in total assets. So, to solve this problem, the Ethereum community has introduced the ERC-7265 token standard.
In this guide, we will reveal the ERC-7265 token standard and how it mitigates risks in DeFi.
Understanding the ERC-7265 Token Standard
The ERC-7265 also introduces a ‘circuit breaker’ mechanism for DeFi protocols to stop token transfers when hacked.
Re-entrancy attacks, logic errors, or manipulation of oracles can cause hacks. A smart contract interface to the circuit breaker would exist independent of the underlying protocol structure, and the circuit breaker would function. Frequently, it acts as a pass-through token transfer, with pauses on any given token transfer whenever a pre-established threshold of a metric is reached.
Until such an underlying protocol issue is resolved, token transfers will continue to be stopped. The ERC-7265 standard seeks to recover losses caused by attackers in malicious protocol attacks. It gives developers working on ERC-compliant protocols the flexibility to implement a circuit-breaking mechanism for their protocol in a bespoke fashion.
One of the circuit breakers is customizable in two ways. For example, it can delay settlements of an outflow and temporarily hold custody of assets during a protocol breach, or it can reverse any attempted outflows. These two approaches provide developers with total autonomy and stabilize the protocol.
ERC-7265 can be used by DeFi protocols to reinforce security and reduce the chance of losses.
The Role of the ERC-7265 in DeFi Risk Mitigation
According to BTCRead.com, many could adopt the ERC-7265 standard, which could prevent the risks affecting DeFi.
Increases Security
Circuit breaker mechanisms can help avoid astronomical losses in case of an unusual market condition or when some metrics are breached, possibly implying that such activity is malicious. Instead, when token outflows are attempted, the circuit breaker halts them temporarily to prevent customer assets from being lost.
Improves Protocol Stability
A circuit breaker is designed for use in unpredictable market conditions to suspend token transfers and reduce losses from severe amounts.
Protocol Users can respond better to resolve the issue and transfer stop. Furthermore, using the ERC-7265 standard will increase confidence and trust in a DeFi protocol.
Reduces Risk
Developers can delay settlement or reverse token transfers by augmenting Ethereum protocol security with the ERC-7265 standard. With this feature, a DeFi protocol can reduce the possibility of risk while increasing investors’ confidence.
Protect Users
In such cases of extreme market volatility or smart contract vulnerability, the circuit breaker can help save users from serious losses or protect their assets.
Developer Customization
Developers offer two implementations of ERC-7265 based on a unique protocol’s tokenomics and use cases. The two approaches involve postponing the settlement and possessing custody of assets or avoiding the token transfer altogether.
Benefits and Drawbacks of ERC-7265
Let’s discuss the benefits and concerns of the ERC-7265 standard that includes:
Benefits
- Easy to be Customized: The thresholds of the ERC-7265 standard are easily customizable according to the specific protocol needs. Protocols with community governance require flexibility since they encourage user support for implementing safety mechanisms.
- Reduced losses: DeFi protocols will be affected less by market volatilities or code vulnerabilities.
- Drive adoption: Integrating ERC-7265 can restore user trust in DeFi protocols, aiding in the mass adoption of DeFi technology.
- Prevents Attacks: The fact that the ERC-7265 standard reduces the possible profit for future attacks to happen prevents it.
- Interoperability: Including a circuit breaker mechanism in the various DeFi protocols will improve their interoperability, allowing users to seamlessly transfer from one ecosystem to another.
Drawbacks
- Protocol integrity: Developers using the ERC-7265 standard should ensure that DeFi protocols consistently use the standardized structure.
- Network shutdown: If the threshold is triggered due to misinterpretation of events, the circuit breaker will activate, and the whole network will stop. Such a situation can create instability within the entire community.
The Bottom Line
According to various crypto experts, ERC-7265 can be a great risk reduction and security tool for the DeFi ecosystem. It might quite well be adopted, though it will only be adopted if the Ethereum community accepts it and developers see the standard’s integration into the network’s infrastructure. If the threshold for approval is met, DeFi protocols can operate more securely and resiliently.
