Hacks cripple most DeFi projects, but survival is possible

Fewer than half of all DeFi protocols targeted by hacks or exploits endure. According to Cozy Finance, a blockchain-based market offering DeFi businesses “FDIC-like” insurance, only 39% of 64 analyzed projects with over $1 million in user deposits survived post-hack.

Cozy’s findings challenge the belief that a hack is a guaranteed project killer. Their report notes, “Many DeFi founders take a fatalistic view of hacks, striving to prevent them with best security practices but assuming that a hack will probably be project-ending. A project surviving a hack is more likely than many think.”

Hacks remain a constant threat due to the irreversibility of blockchain transactions. Once stolen, crypto cannot be recovered by banks or governments. This reality has led to staggering losses—over $1.2 billion in crypto theft this year alone, per DefiLlama, and $9 billion since 2016. Notably, North Korea has exploited DeFi vulnerabilities to fund its nuclear weapons program, further underlining the sector’s exposure.

Cozy highlights two factors that significantly improve survival odds: recovering stolen funds and reimbursing users. Of the projects analyzed, 44% managed to recover some or all of their stolen funds. Those that did were nearly twice as likely to survive. Moreover, reimbursement rates had a strong correlation with survival:

• Projects returning 80% of stolen funds to users had a two-thirds survival rate.
• Projects reimbursing 60% or more had a 100% survival rate.
• Conversely, those reimbursing less than 25% had only a 12% survival rate.

Even when projects couldn’t recover stolen funds, effective user reimbursements greatly improved survival odds.

Bitgalactic Commentary

DeFi founders must shift from a fatalistic mindset to a resilience-driven approach. The data underscores that user trust is the linchpin of survival. Proactively building mechanisms for fund recovery and user reimbursement isn’t just risk mitigation—it’s a survival strategy. Bitgalactic sees a clear path for DeFi projects: prioritize robust recovery protocols, incentivize white-hat hackers for prevention, and establish emergency funds. Survival isn’t just possible; it’s a matter of preparation and trust-building.