DeFi (decentralized finance) is the wild west of Web3. In 2021 alone, DeFi users lost a staggering $10.5 billion through theft, fraud, and other nefarious activities like rug pulls. Even with a bear market and seemingly open season for hackers, Web3’s growing popularity is attracting a new wave of decentralized finance users. To help fight DeFi-related crime, a blockchain company called Chainalysis has a new tool called Storyline that attempts to remove the complexity of smart contracts in tracking transactions.
Chainalysis has been in the cryptocurrency research business since its inception over eight years ago. “In 2014 there was a big hack of Mt. Gox,” Jacob Illum, chief scientist at Chainalysis, said in an interview with The New Stack, “and it was really difficult to track where the funds went. It was at this point that the company’s founders got together and decided that there had to be some kind of tool that could help investigate these [transactions] in a graphical way.”
Make smart contracts easier to read
One would assume that the purpose of a smart contract is to make things easier. What is actually happening is that the more advanced Web3 becomes and the more transactions take place on it, the more entangled the web of smart contracts becomes. Illum said, “Unless you understand what’s actually going on in these increasingly complex smart contract calls, it looks almost impossible to track the funds.”
He added: “In 2014, everything was basically a point-to-point value transfer. Now there is a lot of infrastructure with smart contracts. Within these smart contract clauses, many subcontracts are invoked and it is basically a whole set of computer programs interacting within this smart contract.”
With all these new difficulty levels, how do you get down to business? Illum says that’s where storyline and its “demystifying” features come in. “It’s really about getting into all the core details of interactions that go into a smart contract and basically trying to pick the meat off the bone.”
But what exactly is the process of filtering information from the smart contract it’s on? Remember that a smart contract shows every action that a user has done with it, in addition to what happens in the backend. Balance checking, deposits, coin transfers and everything else that takes place in your wallet. Imagine trying to sort through all of those different interactions when you’re looking for the one interaction that resulted in your money being stolen. Not only is it inefficient, it would probably be impossible without the help of proper technology.
Illum says that’s where Storyline’s “demystifying” features come into play. “What our tool does is analyze all this complexity and then judge, ‘What’s actually relevant here?’ What does the user need to see?”
Get a clearer view of transactions
The Storyline software may not be an Insta-fix for DeFi theft, but it does turn back a very important layer: user intent. “We present and identify the intent, show the user the name of the intent or basically give them a description of what the intent of this transaction should be, and [in] the result of that intent,” Illum explained.
“Here’s a good example,” he continued. “You may want to exchange one token for another token, which is a common use case within the blockchain with a decentralized exchange. But there are many ways to do this. You can go directly to a liquidity pool to do this, or you can go through the router of the specific liquidity pool you are interested in. You can choose to go through an aggregator that will look through all the different liquidity pools and find one that is best for you, or maybe even split your query across multiple liquidity pools to give you the best interest rate. At the end of the day, it was your intention to convert that token into that token, but many decisions were being made in the background that you really had no say in. It wasn’t you, you relied on the service that you used to do. Storyline would evaluate and identify that you went to that aggregator to exchange that token for that one and the rest is just complexity.”
Again, this is not a magic bullet for victims of cybercriminals. But it’s a step in the right direction to make smart contracts and transactions easier for investigators, so it would be much easier to catch those hackers – and maybe some users could see their money back.
“We’re still in the early stages,” Illum said, “[and] There is a lot to do on the consumer protection side. We still see these DeFi exploits. But you know, smart contracts are software. Software has bugs, and that’s inevitable. I think some of the real challenges we are facing right now are: How can we provide consumer protection knowing that there will be bugs in the software without people losing their savings?”
There doesn’t seem to be a concrete answer yet, but at least someone is asking the right questions.
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