Author: K Ericak

The current market situation resembles a fusion of 2019 and 2022, with various issues erupting simultaneously, presenting challenges comparable to hell-level dungeons.

Compared to 2019, the atmosphere is indeed similar, but it lacks the sense of hope that "the DeFi era is about to arrive." The market feels more bleak. The external environment is leaning towards the real economy, while the internal market lacks major trends, with only scattered hotspots. Essentially, it remains a market with limited liquidity, but the ecological fragmentation is more severe. Each specific ecosystem's forced mini bull market resembles a smaller version of the $trump effect, and these fleeting hotspots often become opportunities for some to escape the market.

Compared to 2022, this round of downturn can be described as "taking the dregs and leaving the essence." The market is filled with uncertainty, but one thing is certain: the upcoming governance attacks are likely to far exceed those of the last bear market. During the market's "garbage time," it is advisable for users to adjust their positions and on-chain interaction methods early to reduce risks.

What is a Governance Attack?

A Governance Attack refers to when an attacker exploits vulnerabilities in governance mechanisms or capital advantages to influence project decisions for personal gain or to disrupt the system. This usually occurs during periods of low governance token prices and exhausted market liquidity, allowing attackers to acquire governance rights at a low cost.

In the last bear market, the most common patterns of governance attacks included:

• Governance token or NFT prices plummeting, but the protocol Treasury still holding a large amount of assets, attracting attackers with arbitrage opportunities.
• Attackers acquiring governance tokens at low prices (especially for smaller protocols) or using flash loans to temporarily borrow governance tokens for voting manipulation.
• Attack targets typically include two categories:
  1. Stealing funds: Directly transferring Treasury assets, causing the protocol to become unsustainable, leading to a plummet in governance token prices, and potentially resulting in the project's complete demise.
  2. Changing contract logic: Especially in Proxy mechanism full-chain governance projects, once permissions are seized, attackers can modify contract logic, thereby affecting user asset security.

Proxy Mechanism Overview: Proxy allows protocols to update contract logic without changing the original contract address. This is very common in the DeFi space, but if governance rights are obtained by attackers, they can modify the Proxy to execute malicious actions, such as transferring user assets or altering trading rules.

Real Case: The Threat of Governance Attacks

During market downturns, as most users' attention is scattered, the Crypto ecosystem can easily turn into a "dark forest," filled with potential hunters. In the last bear market, even if some protocols had only a few tens of thousands of dollars in arbitrage opportunities left, there were still individuals willing to lie in wait and ultimately launch governance attacks, directly destroying the protocols.

More seriously, in this round of downturn, in addition to external attackers, some project teams themselves may also engage in malicious governance voting, such as:

• Issuing tokens out of thin air, diluting holders' rights and plundering community value.
• Typical case: CRO March governance proposal (Proposal Link)
  • The proposal suggested a "New Golden Era for Cronos," proposing to issue 70 billion tokens out of thin air on top of the original total supply of 30 billion.
  • This proposal was unlikely to pass, but the official voted in support, leading to its narrow approval.
  • Subsequently, the project team issued a proposal to burn 50 million CRO tokens in an attempt to appease the market, which appeared extremely absurd.

Such governance attacks severely harm ordinary token holders, especially those who hold long-term but do not pay attention to governance proposals, making them susceptible to significant losses.

How Can Ordinary Users Avoid Risks?

1. Avoid long-term, unlimited authorization of stablecoins like USDC

   • Choose a limit each time you authorize to avoid long-term open permissions.
   • Use Revoke.cash to regularly check and revoke unnecessary authorizations, while periodically changing wallet addresses.

2. Select projects to participate in, avoiding protocols with opaque governance mechanisms

   • Especially projects with unverified Proxy mechanisms and lack of oversight.
   • When participating in new DeFi projects, be sure to pay attention to whether there is a risk of governance rights being abused.

3. Monitor governance proposals to avoid malicious governance changes

   • Regularly check DAO governance proposals for any malicious issuance, fund transfers, etc.
   • Rely on individuals or delegate researchers (such as the Protector established by the @byobu4 team) to monitor governance risks, and unite with other token holders for countermeasures when necessary.

Future Outlook: Governance Attacks May Become the Norm During Market Downturns

Recently, in discussions with several whale friends, there is a general pessimistic attitude towards the market. Some investors originally believed that DeFi could ride the wave of loosening U.S. policies, but the current market liquidity has further fragmented and depleted. The recent mini bull market forcibly created by BSC still fails to improve the overall capital flow situation. If this trend continues, governance attacks may escalate, and market conditions could worsen.

In the global environment of "devirtualizing and returning to reality," the absurd phenomena in the Crypto world may just be a prelude to an even more absurd reality. In the face of future uncertainties, preparing for the worst in advance and avoiding obvious risks will always be the more prudent choice.

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