Why DeFi keeps bleeding when things go wrong—and how we can fix it without centralizing control

On Wall Street, when markets drop too fast, trading stops.

They call it a “circuit breaker.” It’s automatic. It’s encoded. And it’s saved trillions in panic sell-offs—from the Flash Crash of 2010 to the COVID meltdowns of 2020.

But in DeFi?

When an AMM protocol starts bleeding, there’s no pause. No breaker. No emergency brake. 

Just block after block… of loss after loss.

The reason? Decentralization doesn’t like levers. But that raises a crucial question for everyone building, investing, or surviving in this space:

Should DeFi have dead man switches?

Let’s talk about it.

Do We Want Dead Man Switches in DeFi?

This isn’t just a technical decision—it’s philosophical. A dead man switch is a mechanism that stops the machine when something goes wrong. 

But in a trustless system… who gets to define “wrong”?

The answer depends on where you’re sitting.

From the AMM Side:

Builders want tools to defend their system. When a bug hits or a market moves violently, a pause can buy time, protect user funds, and prevent protocol death.

From the Trader’s Side:

Any switch is a potential cheat code. Imagine you’re shorting a failing token, and suddenly—boom—the market freezes. Trust gone. Exit scam vibes activated.

(Remember Robinhood and Gamestop?)

From the LP’s Side:

They’re tired of being the backstop. When vaults absorb manipulated trades or lose collateral during a hack, a dead man switch could’ve saved them millions.

So what’s the problem?

Abuse

A panic button can be used for defense—or for censorship.
It could be triggered by mistake—or exploited for profit.

Imagine a malicious actor triggering a breaker to front-run a market. Or a protocol using it to protect insiders from liquidation. Or worse—governments mandating when DeFi systems can or can’t operate.

That’s the line we walk. Control protects, but it also creates attack vectors.

Why Circuit Breakers Matter

In TradFi, circuit breakers stop trading if prices move too fast. The idea is simple: prevent panic-driven avalanches and give humans a moment to think.

In DeFi, where code replaces human decision-making, if we decide we need something similar—it can’t be centralized.

Without it, protocols keep executing even as the floor collapses beneath them.

No warnings. No throttles. No failsafes.

And the history is brutal.

When a Panic Button Could’ve Saved Millions

Hyperliquid’s Jelly Incident

A trader manipulated a low-liquidity token to exploit an AMM.
There were no slippage checks. No open interest limits. No vault circuit breakers.
Result: LPs could have eaten the loss while the protocol kept executing malicious trades.

Instead, the supposedly non-existent “middlemen” emerged and intervened. 

Major trust was lost. The truth came out. The “De” in DeFi was a lie.

Read our full breakdown in Episode 1.

Mango Markets

A flash loan attack pumped the MNGO price sky-high, letting the attacker borrow $100 million in stablecoins. 

No breaker paused borrowing. The manipulation became “truth” until it was too late.

Cream Finance & bZx

Reused logic, unpatched vulnerabilities, and composability flaws led to vault draining attacks. 

The protocols watched themselves die in real time. No pause. No rollback. No defense.

Every one of these incidents could’ve been stopped—or at least slowed—by a simple breaker mechanism.

What Circuit Breakers Could Look Like in DeFi

Here’s how we could build brakes without breaking decentralization:

Price-Based Breakers

If a token price drops 50% in 5 minutes? Halt liquidations or trading.

Let things cool down before chaos compounds.

Slippage Guards

If a trade is way off the expected price? Block it.

Slippage thresholds prevent accidental (or malicious) blowouts.

TVL Drain Detectors

If vault funds drop too fast—like more than 30% in one block—pause withdrawals.

This protects against flash attacks draining reserves.

Oracle Conflict Checkers

If Chainlink says $1, TWAP says $2, and your AMM says $4… something’s off.

Stop everything until the prices reconcile.

Governance Panic Buttons (With Guardrails)

DAO multisig can pause the protocol—but only with:

  • Time-delayed execution (e.g., 12 hours)
  • Transparent on-chain vote
  • Pre-published trigger rules

No shadow decisions. No backdoor exits.

But it does take time.

Semi-Novel (and Trustless) Implementations

These are new models being explored to make panic buttons resilient and non-abusable:

Pre-Programmed Pause Logic

  • Smart contracts pause themselves when a condition is met.
  • No human interaction needed.
  • Fully transparent and immutable.

Volatility Index Triggers

  • Protocols measure their own internal “fear index.”
  • When volatility spikes beyond a threshold, they automatically scale down risk—or pause functionality.

Watchdog Networks

  • Bots monitor for anomalies like price discrepancies, vault drains, or flash loan attacks.
  • If triggered, they issue a public flag and suggest a soft pause.
  • Think: decentralized alarms with optional overrides.

But even these ideas create new potential exploits:

  • What if you force a breaker to trigger and front-run the restart?
  • Could malicious actors hold protocols hostage with fake anomaly flags?

Every solution must be stress tested—because even safety tools can become weapons in the wrong hands.

And in the end, the question must be asked: 

Do circuit breakers violate the first principle of non-intervention?

Halting: Weakness—or Resilience?

DeFi doesn’t need more secret centralization. 

It needs structured autonomy. 

As long as the rules are known to all participants.

That means:

  • Transparent rules.
  • Encoded safety mechanisms.
  • Breakers that can’t be abused—but also can’t be ignored.

Perhaps we should let the code protect itself. Let the system defend its users. Let the design absorb chaos without crumbling.

Because survival isn’t censorship.

It’s sovereignty.

Coming Up Next: Rebuilding Trust with Liquidity Providers

In the next episode, we’ll go deeper into the HLP problem—why liquidity providers keep taking the hit when protocols get rekt.

We’ll explore:

  • Vault segmentation.
  • Dynamic hedging strategies.
  • Insurance pools and LP incentives.

Because if we want capital to stay in DeFi, it needs to feel safer than the casino.

MichaelHeadshot
Michael Hearne

I’m a serial entrepreneur, and I’ve spent the last 15 years taking companies to new levels, breaking the boundaries of innovation, and triumphing over adversity. My wife, Victoria, and I started our first business in a 2-bed/1-bath apartment with 4 kids, next to a crackhouse. We pushed through setbacks and failures to lift our family out of poverty. Along the way, I’ve learned that my struggles make me stronger. And that being the best version of me is the greatest contribution I can give to the world. It makes me a better husband, and father. It improves my health, energy, and my capacity to serve others. And it has allowed me to build businesses that make the world a better place. Today, I work for passion, to make a difference, and solve real problems in the real world through my business ventures. This little site is where I share the things I’ve learned, and am still learning, on my journey.