Blockchain Security in Decentralized Finance (DeFi)

Abstract

This thesis explores the security challenges in decentralized finance (DeFi), a system that uses blockchain technology to provide financial services without traditional banks. DeFi faces serious security risks such as hacking, scams, and technical flaws, which threaten its growth and user trust. The study investigates common vulnerabilities like smart contract errors, flash loan attacks, and rug pulls. These problems allow attackers to steal large amounts of money, as seen in real cases like the DAO hack and AnubisDAO scam. The research uses analysis of existing studies and real-world examples to understand how technical weaknesses, poor governance, and human greed contribute to these attacks. The findings show that current solutions, such as code audits and insurance, are not enough to protect users. Technical flaws in smart contracts, like reentrancy bugs or oracle failures, remain major risks. Flash loan attacks exploit instant borrowing features to manipulate markets, while rug pulls involve developers disappearing with investor funds. The study suggests combining technical improvements with better governance to reduce risks. While DeFi aims to operate without central control, some level of oversight is needed to prevent fraud. Future trends may include advanced monitoring tools, decentralized insurance, and education for users. By improving security practices and fostering trust, DeFi can grow into a reliable alternative to traditional finance while maintaining its innovative spirit.