16th April 2026 > > Is DeFi fundamentally broken?

tl;dr

The recent Hyperbridge exploit raises some fundamental questions about the future viability of DeFi, questions that the TradFi world are ready and willing to answer.

Market Snap

Market Wrap

Ooh, look at the perpetual futures funding rate. Any assault on $78k will likely lead to wholesale liquidation of shorts, which would be nice.

Curious Cryptos’ Commentary – Is DeFi fundamentally broken?

The CCC has long been a supporter of the concept of DeFi, which makes the tantalising vision of equal access for all to financial products tantalisingly closer. That can only be a good thing. TradFi is responding with rapid adoption of tokenisation of all financial assets, achieving the same objective. That can only be a good thing too. Both products will live cheek-by-jowl, though it is obvious which one will take the greater market share.

DeFi has always had some problems, largely based on vulnerabilities in the code. Famously, the attack on the very first Decentralised Autonomous Organisation – boringly named “the DAO” – led to a rollback of the early Ethereum blockchain, a move that deeply upset the maxis, proving it was the right decision. But that was just the first of many exploits of code across many DeFi platforms. This is of course a big problem, even though the fraud represents a teensy-weensy proportion of total business executed in DeFi. One must suspect – though I don’t have the numbers to hand – that the percentage of fraudulent activity using dirty fiat in the TradFi world is far, far higher.

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I have a sorry tale to tell, but first, let’s get some definitions out of the way to make all our lives simpler.

Hyperbridge – a DeFi platform built on the Polkadot blockchain to allow for bridging of assets from Polkadot to other blockchains, such as Ethereum.

BRIDGE – the native token of Hyperbridge.

DOT – the native coin of the Polkadot blockchain.

ERC20 – the unique definition of a coin that is Ethereum compatible.

ETH – do I really need to tell you what that is?

HBwDOT – the Hyperbridge wrapped version of DOT that is an ERC20 contract and can therefore be used on the Ethereum blockchain. Native DOT cannot transact on Ethereum, for obvious reasons.

OwDOT – any other wrapped version of DOT that is an ERC20 contract and can therefore be used on the Ethereum blockchain created by an alternative bridge to Hyperbridge.

Note that the many variants of DOT that are wrapped to transact on Ethereum are non-fungible – they each have their own unique ERC20 contract.

All clear? Great, let’s crack on.

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Bridges work very simply in theory.

An owner of DOT sourced on the Polkadot blockchain can deposit say, 100 DOT, into the Hyperbridge smart contract and will receive 100 HBwDOT as an ERC20 token that can transact on the Ethereum blockchain. This is not so different from the original concept of USD and Eurodollars, the former being held in the US banking system and the latter held anywhere else in the world. You can see this at work with onshore and offshore Yuan too, though there is a wrinkle with the latter as there doesn’t tend to be one exchange rate.

Again, in theory, the value of HBwDOT will always be the same as DOT, and in general that has always been the case, for it is collateralised one-to-one with DOT. If the exchange rate between the two coins moved away from one, arbitrageurs will quickly get on buying one and selling the other until the rate corrects itself. Aren’t market forces simply wonderful?

An attacker found a way of forging messages to Hyperbridge, that told the bridge that 1 billion DOT had been deposited into the bridge. In exchange the bridge delivered 1 billion HBwDOT to the address that the depositor had instructed, though no deposit had been made. And just like that, 1 billion HBwDOT had been created by a smart contract with no collateral behind it. I hope you can see the problem.

The attacker then sold as much as possible of that HBwDOT into several liquidity pools, receiving ETH worth roughly $237,000. At that time, 1 billion DOT was worth around $1.2bn, a vivid demonstration of slippage risks when dealing with illiquid liquidity pools – but that is perhaps a discussion for another day.

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Who are the losers here?

HBwDOT is now a worthless coin, for it cannot be exchanged for DOT. And holders of this coin have now lost their entire investment.

Participants in the liquidity pool who swapped their ETH for HBwDOT have lost that ETH in exchange for a worthless coin.

Native DOT took a small hit, from which it has mostly recovered, supported by an increasingly benign macro environment.

Holders of BRIDGE, for the app has been shut down, and the token no longer trades, rendering it worthless.

Holders of any other coin wrapped using Hyperbridge can no longer swap back for the native coin, rendering them worthless. That might potentially change if Hyperbridge were to be made live once more, but it would all be one-way traffic – Hyperbridge’s future is toast.

There can be no doubt that the value destruction is far greater than what the attacker walked away with.

It is worth noting that bridges have long been seen as the weakest point in the DeFi world, with several large and unwelcome exploits to date. This is the reason why the CC Treasury portfolio rules state in Section 5.1, subsection d):

“Under no circumstances will any CC Treasury portfolio manager use bridges. All DeFi activities must be conducted in native coins only.”

Phew, that foresight has dodged a bullet or two.

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It has been suggested that the battle being fought between DeFi coders and those who try to exploit that code is now one between A.I. agents who get smarter and quicker by the day. Does that mean that DeFi is now fundamentally broken?

To be fair, I would be more surprised than you if I was to agree with that supposition, but I think there are some valuable lessons here, which do change the future direction of DeFi, taking it out, ironically, of solely being the preserve of the decentralised world, which we did touch on in the introduction today.

DeFi is not broken for its two major initiatives, the stablecoin revolution (the tokenisation of dirty fiat) and the tokenisation revolution (the tokenisation of all other assets) are both going from strength to strength. That is because of the increasingly supportive regulatory environment, which mandates that collateral must be committed using centralised TradFi organisations and processes, including the deposit, custody, audit, and reporting of those assets. This doesn’t mean that fraud cannot take place, for fraud happens all the time in TradFi. It means there are ways to mitigate that risk both in terms of prevention and in terms of recompense. Outcomes like we see with this Hyperbridge exploit are simply not possible when the centralised world and the decentralised world work together. The CCC has long been at pains to point out that collaboration between these two worlds will provide the greatest benefit to humanity, rather than the extreme positions taken by the maxis and the naysayers, who are as equally wrong as each other.

It is an argument that we are increasingly winning. You can thank me later.