Unpacking DeFi Risks: The Perilous transferFrom Feature

We had a client in Lisbon who had just wrapped up a 20‑year stint in a high‑frequency trading firm. He had built a solid cushion of diversified equities and bonds, but he wanted to dip into something newer—DeFi. He was excited about the promise of unlocking liquidity with minimal friction. But when he opened a wallet and clicked “approve,” I could see the unease that had already begun to creep in.

That moment captured a feeling I see often: the mixture of curiosity, confidence, and the quiet dread that something unseen could derail what seems promising. Let us zoom out a little and look at where that unease comes from in one of DeFi’s most ubiquitous functions: transferFrom.

The Anatomy of transferFrom

At its core, transferFrom is a method defined by the ERC‑20 standard that lets an address send tokens on behalf of another address, provided a prior approval has been granted. It’s the engine behind automated trading bots, liquidity pools, vaults, and, yes, those “DeFi” apps that promise you can earn “passive” returns without opening a bank account.

1. The owner calls approve(spender, amount) on the token contract.
2. The spender—often a smart contract—later calls transferFrom(owner, recipient, amount) to move the owner’s tokens.

That seems straightforward, but it masks a series of trust assumptions:

• The owner must trust the spender to use only what was approved.
• The spender must trust the ledger to enforce that limit reliably.
• The owner’s wallet keeps a secret key; if it’s compromised, everything collapses.

The real risk emerges when you consider that approvals are global—once you approve “any address” for a certain amount, the address in question can transfer those tokens from any of your accounts that hold that token. We usually think of this as a narrow, controlled action, but in practice the world is not that tidy.

A quick illustration

Suppose you have a single wallet named MyWallet:

• You approve the Uniswap router to handle 10 000 UNI.
• Uniswap can move those UNI as it sees fit—slippage, swaps, liquidity provision.

The key point: Only 10 000 UNI are at risk. But what if you hold multiple accounts (MyWallet‑A, MyWallet‑B, MyWallet‑C) that collectively own 30 000 UNI and you approve each wallet’s address to the same Uniswap router? Now the router can pull 10 000 UNI from each account, totalling 30 000 UNI, without your explicit consent for each. That’s a scenario I’ve seen crop up when users forget that approvals are per‑token, not per‑address.

History of the risk: the USDT episode

In 2021 an incident with Tether’s ERC‑20 token brought the transferFrom risk into the spotlight. The incident unfolded in these steps:

1. An attacker created a rogue contract and convinced the official USDT contract to approve that contract for a huge amount of tokens.
2. That contract called transferFrom on the USDT contract, draining the real wallet that had set the approval, not the attacker’s wallet.
3. The USDT contract ended up issuing tokens to the attacker’s balance, effectively minting them from a compromised user’s funds.

Because approve is not owner‑specific, the attack could be performed with zero balance on the attacker’s side initially. It exposed a subtle flaw in the design: token issuers could mistakenly trust that approvals are “who owns the token, not who owns the allowance.” It was a stark reminder that simple design choices have real‑world consequences.

Why this matters to everyday investors

The average person engaging with DeFi today does not read the code. They press a button and rely on the ecosystem’s transparency. The reality is that the permission model inherent to ERC‑20 token interactions is a double‑edged sword. It enables automation that we find convenient but also opens a door for misuse.

When your confidence leans heavily on a platform’s reputation (say, Uniswap or Aave), it isn’t enough to trust that the contracts are audited. You must also question the underlying mechanics that let a contract move your tokens automatically. One small oversight can mean the difference between smooth rewards and missing your savings.

Common pitfalls

1. Unlimited approvals

Smart contracts often ask for an “allowance” equal to the maximum possible (e.g., 2^256‑1). This gives the contract free reign over your token balance, so if someone writes a malicious function, they have the leeway to pull everything at once. You see this when launching a new protocol; it feels safe to grant the max allowance to reduce gas costs later.

2. Repeated approvals for the same token

If you approve a contract, then later change your mind or decide to stop interacting with that token, you might forget to revoke the allowance. The old contract still has the rights to move your tokens. I have a client who left a DeFi vault and never revoked the approval, then later received a phishing email that convinced her to re‑enable the allowance for a malicious contract.

3. Cross‑chain bridges

Layer‑2 solutions or cross‑chain bridges often use permit or transferFrom under the hood. While they claim to do a “secure bridge,” the logic sometimes hinges on an off‑chain signature that an attacker could forge if the underlying contract had a bug, leading to a transferFrom that drains the user’s account.

4. Phishing and social‑engineering

A seemingly harmless link to a token’s website could direct you to an impersonated contract that requests an approval. If you approve, you unwittingly hand over control to a malicious actor.

Mitigating strategies

I’ve distilled a few practical habits from my experience that help keep the risk under control. They’re not exhaustive, but they’re actionable.

Check the contract address before approving

• Use official portals: Navigate only through official sites.
• Verifications: Look for a verified badge on Etherscan or the official source on GitHub.
• Community alerts: Many subreddits and Discords post alerts about new malicious contracts; a quick search can save you.

Revise approvals regularly

• Audit your allowances: Use a service like Checkpoint or Covalent. These show you all ERC‑20 approvals linked to your wallet.
• Revoke when not needed: Use the built‑in “Revoke” button on your wallet or third‑party apps.
• Set limits: Instead of a max allowance, only approve the exact amount you anticipate will be used.

Apply “approve‑and‑call” instead of “approve”

Where possible, use the “approveAndCall” pattern. That way a single transaction both approves and triggers the intended action, reducing the window of opportunity for a malicious actor.

Keep the private key offline

• Hardware wallet: Store your private key on a hardware wallet and only use the signer for transactions you control.
• Avoid hot wallets for large balances: Keep day‑to‑day operations on a hot wallet, but never lock a large balance in it that could be swept via transferFrom.

Understand the contract logic

If you’re interacting with a new protocol, read at least the high‑level whitepaper or the audited smart contract code. Even if you don’t have the time to dissect the solidity file, a summary of the approval model can help.

A personal anecdote

I remember a moment when I was reviewing the code of a new vault that promised 20% APY. The code had a transferFrom call that pulled the deposited tokens from the user's wallet. Instead of relying on an external approval, the contract attempted to pull directly from the user's signature. In theory this is safe, but in practice the function had an unchecked revert that let an attacker call it with a zero signature, causing the vault to think the account had signed and then pulling funds.

After that incident, I began insisting on using a “pull‑over‑push” model. Instead of pulling funds from the user’s account, the user pushes tokens to a dedicated vault address that is under their control. That adds another layer of safety: the vault only holds tokens it was paid explicitly.

Let’s zoom out again

When we look at transferFrom, we’re in front of a function that was designed to solve a genuine need—the need for automated token movement without continuous user intervention. Yet, it also unlocks a path for malicious actors, especially when combined with the global allowance model.

In a broader sense, our journey into DeFi is akin to planting a garden. We want to sow seeds (investments), water them (provide liquidity), hope for growth (returns), and watch them flourish. The transferFrom risk is a weed that can silently grow if we’re not vigilant. The key is not to abandon the garden, but to establish rules, prune, and keep a watchful eye.

One actionable takeaway

When you interact with a DeFi protocol, never give it an unlimited approval. If you must approve, set the exact amount you intend to use and revoke the approval once you’re done. Tools like checkup services can help you see all active allowances and remind you to clear them.

By treating allowances like a temporary key for a specific door, we reduce the chances that a rogue keyholder can walk in at the most inconvenient time. This small habit can protect you from the subtle, but real, threat that transferFrom brings.