DeFi Investigation Techniques in 2025

The DeFi Investigation Challenge

Decentralized Finance (DeFi) presents unique challenges for blockchain investigators. Unlike centralized exchanges with KYC requirements, DeFi protocols are permissionless, pseudonymous, and operate through complex smart contract interactions. With over $100 billion locked in DeFi protocols and $10.77 billion lost to hacks in 2024, understanding how to investigate DeFi is critical for forensics professionals.

Understanding DeFi Architecture

Before investigating DeFi, you must understand the core components:

• Smart Contracts: Self-executing code that governs protocol behavior
• Liquidity Pools: Automated market makers (AMMs) that enable trading
• Governance Tokens: Tokens that provide voting rights in protocol decisions
• Oracles: External data feeds that provide price information
• Flash Loans: Uncollateralized loans that must be repaid in a single transaction
• Yield Farming: Strategies for earning returns by providing liquidity

Investigation Techniques

1. Smart Contract Analysis

Analyzing smart contracts is fundamental to DeFi investigations:

• Source Code Review: Examine verified contract code on Etherscan or similar explorers
• Function Calls: Analyze which functions were called and with what parameters
• Event Logs: Review emitted events to understand contract state changes
• Internal Transactions: Track contract-to-contract interactions
• Proxy Patterns: Identify upgradeable contracts and their implementation addresses

2. Flash Loan Tracking

Flash loans are frequently used in DeFi exploits. Key tracking techniques:

• Loan Origination: Identify the lending protocol (Aave, dYdX, Uniswap)
• Execution Path: Map the sequence of contract calls within the transaction
• Arbitrage Detection: Identify price manipulation across multiple DEXs
• Profit Calculation: Calculate net profit after loan repayment and gas fees
• Attack Pattern: Classify the exploit type (oracle manipulation, reentrancy, etc.)

3. Liquidity Pool Analysis

Understanding liquidity pool interactions is crucial:

• Pool Composition: Analyze token ratios and total value locked (TVL)
• Swap Patterns: Identify large trades that impact price
• Liquidity Provision: Track who adds and removes liquidity
• Impermanent Loss: Calculate losses from price divergence
• Rug Pull Detection: Identify suspicious liquidity removals

Common DeFi Fraud Schemes

1. Rug Pulls

Developers drain liquidity from their own protocols:

• Liquidity Removal: Developers remove all liquidity from pools
• Backdoor Functions: Hidden functions that allow token minting or transfers
• Ownership Concentration: Developers hold majority of tokens
• Unverified Contracts: Source code not published or verified

2. Oracle Manipulation

Attackers manipulate price feeds to exploit protocols:

• Flash Loan Attack: Borrow large amounts to manipulate DEX prices
• Oracle Lag: Exploit delays in price updates
• Single Source: Protocols relying on one oracle are vulnerable
• Sandwich Attacks: Front-run and back-run large trades

3. Governance Attacks

Malicious actors gain control of protocol governance:

• Token Accumulation: Buy enough governance tokens to pass proposals
• Flash Loan Voting: Borrow tokens temporarily to vote
• Malicious Proposals: Propose changes that benefit attackers
• Timelock Bypass: Exploit short timelock periods

Case Study: Wormhole Bridge Hack ($325M)

The Wormhole bridge hack in February 2022 demonstrates sophisticated DeFi exploitation:

• Vulnerability: Signature verification bypass in bridge contract
• Exploit: Attacker minted 120,000 wrapped ETH without depositing collateral
• Laundering: Funds moved through multiple protocols and chains
• Investigation: Blockchain analysis identified attacker's addresses
• Recovery: Jump Crypto replaced stolen funds to maintain bridge solvency

This case highlights the importance of understanding cross-chain bridge mechanics and the complexity of multi-protocol investigations.

Advanced Investigation Tools

Professional DeFi investigators use specialized tools:

• Etherscan/Block Explorers: View transactions, contracts, and events
• Tenderly: Debug transactions and simulate contract interactions
• Dune Analytics: Query blockchain data with SQL
• Nansen: Track smart money and whale movements
• Phalcon: Analyze exploit transactions and attack vectors
• Forta: Real-time threat detection for DeFi protocols
• Slither: Static analysis tool for smart contract vulnerabilities

Cross-Chain Investigations

Many DeFi exploits involve multiple blockchains:

• Bridge Tracking: Follow funds across chain bridges
• Wrapped Assets: Understand token wrapping and unwrapping
• Multi-Chain DEXs: Track trades across different chains
• Layer 2 Analysis: Investigate Arbitrum, Optimism, and other L2s
• Sidechain Forensics: Analyze Polygon, BSC, and other sidechains

Best Practices for DeFi Investigations

• Start with the Transaction: Analyze the exploit transaction in detail
• Map Contract Interactions: Create a flow diagram of all contract calls
• Identify Profit Flow: Track where stolen funds ultimately went
• Check for Patterns: Compare with known exploit patterns
• Analyze Attacker Behavior: Look for preparation transactions and testing
• Document Everything: Maintain detailed records for potential legal proceedings
• Collaborate: Share findings with protocol teams and security researchers