📋 Overview
Your DeFi protocol has received a demand letter from a user claiming losses due to a smart contract exploit, hack, or security vulnerability. These claims typically allege negligence in security practices, failure to protect user funds, or misrepresentation of protocol safety. This guide helps protocol developers and DAOs build an effective defense.
🛡 Security Audits
Multiple independent security audits and remediation records demonstrate reasonable security practices and due diligence.
📄 Risk Disclosures
Clear warnings that DeFi is experimental, smart contracts may contain bugs, and users assume all risk of loss.
🔗 Open Source Defense
Publicly auditable code allows users to verify security themselves, supporting an assumption of risk defense.
Common Exploit Claim Types
| Claim Type | Allegation | Defense Strength |
|---|---|---|
| Negligent Security | Failed to implement reasonable security measures | Strong with multiple audits |
| Unpatched Vulnerability | Known issue not fixed before exploit | Weak if audit findings ignored |
| Oracle Manipulation | Failed to protect against oracle attacks | Depends on oracle documentation |
| Flash Loan Attack | Protocol vulnerable to economic exploits | Depends on risk disclosures |
🛡 Defense Strategies
Build your defense around these key legal arguments and factual foundations.
Security Audit Documentation
Multiple independent security audits from reputable firms demonstrate reasonable care. Document all audit reports, findings, and remediation actions taken. Show ongoing security monitoring and bug bounty programs.
Risk Disclosure and Assumption of Risk
Clear terms stating that DeFi protocols are experimental, smart contracts may contain undiscovered bugs, and users assume all risk of loss. Documentation that users acknowledged these risks before interacting with the protocol.
Open Source Code Defense
The protocol code is publicly available for anyone to audit. Users could have reviewed the code themselves or hired auditors before depositing funds. This supports assumption of risk and "as-is" software arguments.
Decentralization Defense
If the protocol is truly decentralized and governed by a DAO, individual developers may not have liability. Document the decentralized governance structure, lack of admin keys, and community control over the protocol.
Third-Party Attack Defense
The exploit was caused by a malicious third-party attacker, not protocol misconduct. The protocol was the victim of criminal activity. Document the attack vector, law enforcement referrals, and efforts to recover funds.
Arbitration and Class Action Waiver
Terms requiring individual arbitration prevent costly class actions from multiple affected users. Motion to compel arbitration addresses claims individually.
⚠ Insurance Claim Coordination
If your protocol has smart contract cover or cyber insurance, coordinate with insurers before responding to claims. Insurance policies may require specific procedures and could affect your response strategy. Do not admit liability without insurer consultation.
📄 Key Documentation
Preserve and organize these documents to support your defense.
Security Documentation
- Audit reports: All security audits with findings and severity ratings
- Remediation records: Evidence of fixing identified issues
- Bug bounty program: Program documentation and payouts
- Security monitoring: Ongoing monitoring tools and alerts
- Incident response plan: Pre-existing security response procedures
User Agreements and Disclosures
- Terms of Service with risk disclosures and liability limitations
- User acknowledgment records before first interaction
- Risk warnings displayed on the protocol interface
- Documentation disclaimers in protocol docs
Incident Records
- Exploit timeline and attack vector analysis
- Post-mortem report
- Law enforcement referrals and reports
- Recovery efforts and fund tracing
- Communications with affected users
- DAO governance votes related to incident response
Blockchain Records
- Claimant's wallet interaction history with the protocol
- Transaction records showing deposits and losses
- Attacker wallet analysis and fund flow tracing
- Smart contract deployment and version history
💡 Litigation Hold Notice
Upon receiving a demand letter, immediately issue a litigation hold notice. Preserve all security-related communications, audit reports, incident response records, and governance discussions. Failure to preserve evidence can result in adverse inference instructions.
📝 Sample Response Letter
🔗 Related: DeFi User Demand Letters
Understanding what users are advised to include in their demand letters can help you prepare a stronger defense.
View DeFi Demand Letter Guides →💰 Pricing
Professional legal assistance for responding to DeFi exploit claims.
Legal Services
- 📄 Response letter: Flat fee $450
- ⏳ Extended negotiation: $240/hr
- 📊 Insurance coordination: $240/hr
Initial response letters include review of your security documentation, terms of service, and incident records, plus a customized response letter. Extended negotiation, arbitration defense, and insurance claim coordination billed hourly.
🚀 Next Steps
Day 1: Preserve
Issue litigation hold. Preserve all security documentation, incident records, and communications.
Day 1-3: Insurance
Notify insurers if you have smart contract cover or cyber insurance. Follow policy procedures.
Week 1: Respond
Send initial response letter asserting defenses and demanding arbitration.
Week 2+: Defend
If claimant proceeds, enforce arbitration clause and prepare comprehensive defense.
Protect Your Protocol
Get professional help defending against DeFi exploit claims.
Schedule Consultation - $450Resources
- Security auditors: Trail of Bits, OpenZeppelin, Consensys Diligence
- Insurance: Nexus Mutual, InsurAce, traditional cyber liability carriers
- Blockchain forensics: Chainalysis, TRM Labs, Elliptic
- AAA/JAMS: Arbitration providers for dispute resolution