Are Verifiable Random Functions the Key to Solving DeFi's Security Issues?

Decentralized Finance (DeFi) has been a game-changer for the financial industry, providing users with financial services that are transparent, accessible, and free from centralized control. However, DeFi also faces several security challenges that could potentially harm users' assets. In this article, we explore the role of Verifiable Random Functions (VRFs) in addressing these security challenges and whether VRFs are the key to solving DeFi’s security issues.

A verifiable random function is a type of cryptographic function that computes a set of inputs into a pseudorandom output and provides verifiable evidence of authenticity. A public/private key pair (sometimes referred to as a verification key and secret key) and a seed are frequently used as inputs for a VRF. A seed is chosen, and a public/private key pair is produced. These inputs are sent to the VRF, which generates a random number using the private key and the seed. Based on that, the VRF then generates a random number and a proof. Importantly, the creation of a proof makes the function verifiable while maintaining the number's randomness by keeping the secret key hidden. Mathematically explained, given the input x, the holder of the secret key SK** can determine  (y,y)= FSK(x)  where y is the pseudorandom output and is the proof of y. Anyone can verify that the value of y was indeed computed correctly by using the proof and the public key PK, but this information cannot be used to find the secret key SK **by this formula PK= GSK

To learn more about VRFs and their applications to the blockchain industry, we recommend you to check out our article on the topic: Verifiable Random Function (VRF) & Applications in Blockchain - Orochi Network. 

The DeFi ecosystem is vulnerable to various types of attacks due to the permissionless and decentralized nature of its architecture. One of the most significant challenges is the risk of data manipulation by malicious actors, leading to financial losses for investors. Verifiable Random Functions (VRFs) have emerged as a potential solution to this problem.

Let's take a look at some of the possibilities that VRFs can provide for Defi securities:

Using VRFs in DeFi can ensure the integrity and security of the data fed into smart contracts. The randomness generated by VRFs can be used to determine the outcome of a contract, such as the selection of validators or distribution of rewards. This randomness ensures the fairness and transparency of the process, making it difficult for malicious actors to manipulate the outcome.

VRFs can also be used to solve other security issues in DeFi, such as front-running attacks. Front-running is a common attack where a malicious actor observes a transaction before it is added to the blockchain and then submits a transaction with a higher gas fee to get ahead of the original transaction. By using VRFs to generate random order numbers for transactions, the order of transactions can be randomized, making front-running attacks much more difficult.

Another security issue in DeFi is the vulnerability of smart contracts to hacking attempts. Smart contracts are self-executing contracts that operate on the blockchain and can hold large amounts of funds. VRFs can be used to add an extra layer of security to smart contracts by providing a random seed to the contract that determines its execution. This seed can be generated using VRFs to ensure that it is random and unpredictable, making it difficult for hackers to exploit the contract.

Overall, VRFs have the potential to provide a significant boost to the security of DeFi. As the DeFi ecosystem continues to grow, the use of VRFs is likely to become more widespread as a means of enhancing security and ensuring the integrity of the platform.

Orand is a verifiable random function based on elliptic curves (ECVRF) that generates unpredictable and tamper-proof random numbers using advanced cryptographic algorithms. The ECVRF as a service of Orand is distributed across a network of nodes, making it difficult to manipulate or tamper with. Orand provides maximum security, fairness, and transparency, making it an ideal solution for dApps that require impartial and trustworthy sources of randomness. As a system library of UnityOS (Orochi Computation Layer), Orand can provide randomness for all dApps on Orochi Network’s zkWASM and smart contracts on supported Layer-1 chains. 

ECVRF works by combining a secret key and a publicly known input to generate a random function output. The output is then combined with the input and a publicly known nonce to produce a verifiable output. The verifiable output can be verified by anyone using the corresponding public key.

Orand can't be considered completely DeFi yet, but it's an extremely important segment and contributes a lot in this field, so we would like to take this example as well

Orand’s use of ECVRFs can ensure that the selection process is fair and unbiased. The use of ECVRFs also ensures that the selection process is transparent and verifiable. This is important because it helps to prevent manipulation and collusion by malicious actors.

Orand ECVRF can protect users against exploits, developers need a way to create randomness that is verifiable and tamper-proof from miners and rerolling users. What is required is randomness sourced off-chain from an oracle. However, many oracles that offer the ability to source randomness have no way to actually prove that the number they deliver was indeed generated randomly (manipulated randomness just looks like normal randomness, you can’t tell the difference). Developers need to be able to source randomness off-chain while also having a way to definitively and cryptographically prove that the randomness has not been manipulated.

VRFs have the potential to provide a solution to the security challenges faced by DeFi platforms. By ensuring the randomness and fairness of processes, VRFs can enhance the integrity and overall security of DeFi. The use of VRFs in Chainlink's and Uniswap's protocols demonstrates the effectiveness of VRFs in addressing DeFi's security challenges. The future potential for VRFs in DeFi is vast, and we can expect to see further integration and adoption of VRFs in DeFi protocols.