The cryptocurrency and decentralized finance (DeFi) industries have grown rapidly in recent years.

 

As a result, billions of dollars are locked in DeFi protocols, attracting cybercriminals who have exploited vulnerable points across the industry.

 

DeFi protocols have been the primary target of many attacks, resulting in significant user losses. In 2022, crypto attacks led to the theft of $3,800,000,000 in digital assets, according to a Chainalysis report.

 

To improve the security of the DeFi protocol, a group of Ethereum developers has proposed a new standard called ERC-7265.

 

This standard introduces a circuit-breaker mechanism that can help mitigate cyber risks and improve security by temporarily stopping the flow of tokens when a predetermined threshold is exceeded.

 

What is ERC-7265?

 

 

Quoting cointelegraph.com, ERC-7265 is an Ethereum Improvement Proposal (EIP) defining a circuit breaker mechanism standard.

 

A circuit breaker is a control mechanism that can temporarily disable a system or process in the event of an overload or other issue.

 

Circuit breakers can stop the outflow of tokens during malicious attacks and help mitigate risks to protect the protocol and its users.

 

When predefined thresholds for usage metrics are breached, circuit breakers will suspend the flow of tokens until the issue is resolved.

 

That can help prevent large losses in flash loan attacks or other malicious exploits. For developers working on protocols on Ethereum, the ERC-7265 standard provides the flexibility to customize the circuit breaker mechanism to the needs of a particular protocol.

 

They can structure the circuit breaker so that it is effective in addressing risks and also does not harm the user experience. For example, developers can parametrize various threshold sets for different types of transactions.

 

Certain transactions may be identified as higher risk and may require higher control mechanisms defined around them. Circuit breakers can also be defined for specific periods or until certain conditions are met.

 

Benefits or Vital Role of ERC-7265 in the DeFi Ecosystem

Quoting the cointelegraph.com page, the circuit breaker mechanism in ERC-7265 offers the following benefits, among others:

 

Increased security

As explained above, circuit breakers can help reduce risk and protect users from malicious attacks by stopping transactions that violate thresholds.

 

Loss reduction

If a flash loan attack is launched against the DeFi protocol, a circuit breaker can be triggered to suspend the token flow and prevent the attacker from draining the funds of the protocol.

 

If innovations from the Ethereum development community can help protect user funds, other protocols can replicate the functionality, preventing billions of dollars from being stolen.

 

Flexibility

Developers can use circuit breaker mechanisms to fulfill specific protocol requirements.

 

As explained in the previous section, developers can choose to set different thresholds for different types of transactions, or they can choose to suspend the flow of tokens for a specific period or until certain conditions are met.

 

Increased adoption

With a clear set of controls to protect user funds being developed, the space could attract larger institutional investors, adding credibility to the space. Additionally, this could lead to a similar increase across all major layer 1 chains.

 

Challenges to Overcome

While ERC-7265 offers many benefits, some challenges must be overcome before the standard can be widely accepted. Here are some of these challenges, among others:

 

Implementation

The circuit breaker mechanism must be implemented flawlessly to be effective. If the mechanism is vulnerable, it could cause more damage to the chain.

 

Compatibility

Circuit breakers must be compatible with various DeFi protocols to be effective across a single chain. This can be a challenge, given the various DeFi protocols used today.

 

Acceptance

While this is not an issue with the proposal itself, this update will only provide benefits if the community votes.

 

The Future of ERC-7265 and Its Impact

 

 

Quoting ccn.com, here is the future of ERC-7265 and its need-to-know effects, namely:

 

Implementation Prospects

ERC-7265 implementation has great potential to help prevent DeFi risks and improve the overall security and stability of the protocol.

 

Through an effective circuit breaker mechanism, the DeFi protocol can respond quickly to malicious attacks and stop the flow of suspicious tokens.

 

This can reduce user losses and increase trust in the DeFi ecosystem.

 

Potential Impact on the DeFi Ecosystem

ERC-7265 has the potential to pave the way for a more secure and effective DeFi protocol. By adopting this standard, new and existing protocols could integrate circuit breaker mechanisms to protect user funds and maintain operational stability.

 

Ultimately, it could drive further innovation in developing DeFi protocols and increase user confidence and investor interest in the ecosystem.

 

The Importance of Community Support

The Ethereum community also plays an important role in determining the success and adoption of the ERC-7265 standard.

 

Active support from developers, users, and other stakeholders in testing, revising, and implementing this standard will strengthen the trust and legitimacy of ERC-7265.

 

In addition, proper education and promotion on the benefits and usage of this standard can increase community awareness and interest, accelerating adoption and integration in the DeFi ecosystem at large.

 

Conclusion

In conclusion, implementing the ERC-7265 standard offers some important benefits in the DeFi protocol. ERC-7265 has helped reduce the risk of malicious attacks against the DeFi protocol by introducing a circuit-breaker mechanism.

 

In this regard, its ability to suspend suspicious transactions can help to protect user funds and strengthen overall security.

 

The ERC-7265 circuit breaker also enables the DeFi protocol to respond quickly to emergencies, such as flash loan attacks, by stopping the flow of tokens when necessary, reducing losses to users and preventing significant fund leakage.

 

Furthermore, the ERC-7265 standard also gives developers the flexibility to customize the circuit breaker mechanism to the specific needs of the DeFi protocol.

 

Through the ability to set thresholds, suspend transactions for specific periods, or design custom rules, developers can strengthen the protocol’s security without sacrificing flexibility.

 

Ultimately, the implementation of ERC-7265 has the potential to significantly improve security, reduce risk, and increase the flexibility of the DeFi protocol, which will strengthen user trust and advance the growth of the DeFi ecosystem as a whole.

 

Well, now you understand what ERC-7265 is, starting from understanding specifications and benefits to challenges.

 

Furthermore, you can also read various collections of interesting articles about blockchain technology on INDODAX Academy, such as the differences between ERC-721 and ERC-1155.

 

As a reminder, to deepen your knowledge about blockchain technology, it is a good idea to read various current articles on INDODAX Academy to broaden your horizons. Hopefully, this article can be useful.