The smart contracts feature of blockchain technology can be used for more than just supporting cryptocurrencies; in fact, this feature inspired developers to come up with an entire new sector within the lending industry. Decentralized finance (DeFi) essentially consists of applying blockchain technology to peer-to-peer lending networks, and its flagship product is the bZx protocol, which runs on an Ethereum blockchain and provides lending and borrowing functionality to digital currency traders.

When launched in 2017, bZx attracted considerable attention from financial technology analysts because it seemed to herald the DeFi era. P2P lending networks had been shy about implementing blockchain solutions, but here was a project that immediately set out to provide liquidity to digital currency traders. The automatic collection of lending fees was among the most interesting aspects of bZx, and the speed at which borrowing, lending, and settlement transactions were conducted was amazing. DeFi suddenly seemed like a promising branch of fintech, and it also appeared to be very safe.

Over the last two weeks, a couple of attacks on the bZx protocol allowed hackers to steal $954,000 from the lending platform. The first attack took place on Valentine's Day and while the bZx core development team was attending a digital currency conference in Denver. The team members were enjoying a happy hour event when they were notified about a suspicious transaction involving a "flash loan" product.

A bZx flash loan does not require collateral to be posted; it is ideal for traders who may not be satisfied with the profit potential on the margin and leverage offered by cryptocurrency exchanges. These are loans that are meant to be repaid immediately and automatically once the trade executes. In the two flash loan attacks, hackers were able to take out Ethereum loans and move them around other lending platforms as well as exchanges, thus creating a situation that enable them to artificially inflate the value of an alt-coin token.

Both attacks left bZx holding worthless loans despite having been repaid with profits from the nefarious trades. The actual losses were negligible because bZx routes proceeds from lending fees to an insurance fund; however, the reputation of DeFi applications has been sullied and may take time to recover.