Legacy Smart Contracts as Systemic Risks in DeFi: Lessons from Yearn Finance's Repeated Exploits

The decentralized finance (DeFi) sector has long been heralded for its potential to democratize access to financial services, yet its rapid innovation has also exposed systemic vulnerabilities. Among the most instructive case studies is Yearn Finance, a protocol that has suffered repeated exploits between 2020 and 2025, underscoring the persistent risks posed by legacy smart contracts. These incidents, ranging from $2.8 million losses in 2021 to a $9 million exploit in November 2025, reveal critical flaws in DeFi's architectural assumptions and offer investors a framework for assessing long-term protocol resilience.

A History of Repeated Exploits

Yearn Finance's exploits are not isolated events but part of a pattern rooted in its reliance on complex, evolving smart contract systems. In 2021, a vulnerability in the yDAI pool led to a $2.8 million loss, while a 2023 incident involving a faulty multisig transaction cost the protocol $1.4 million during a routine token conversion. However, the most recent attacks-particularly the November 2025 exploit-expose deeper systemic issues.

On November 30, 2025, attackers exploited a desynchronization in the yETH liquid staking pool's internal accounting mechanism, minting 235 septillion yETH tokens by depositing just 16 wei of Ethereum. This allowed them to drain $9 million in assets, including $8 million from the StableSwap pool and $900,000 from a Curve Finance pool. The attack leveraged flash loans and price manipulation to exploit cached storage variables (packed_vbs[]), which retained residual balances after liquidity withdrawals. A second exploit in December 2025, targeting a legacy iEarn vault, further eroded trust, resulting in a $300,000 loss through TUSD share price manipulation.

Technical Vulnerabilities and Systemic Risks

The November 2025 exploit highlights a recurring theme in DeFi: the trade-off between gas efficiency and security. Yearn's custom stableswap contract, designed to optimize transaction costs, inadvertently created a flaw where the main supply counter and cached balances became desynchronized. This allowed attackers to manipulate the protocol into treating negligible deposits as first-time transactions, minting excessive liquidity provider (LP) tokens.

Such vulnerabilities are emblematic of broader risks in DeFi. Legacy contracts, often retained for backward compatibility, are particularly susceptible to these issues. As noted by a report from Infosecurity Magazine, the attack "underscores the risks of complex AMM mechanics" and gas-saving optimizations. The fact that Yearn's V2 and V3 vaults remained unaffected while legacy pools were targeted further illustrates the dangers of maintaining outdated codebases.

Financial Impact and Protocol Responses

The cumulative financial toll of these exploits has been severe. In 2025 alone, DeFi protocols lost over $2.5 billion to hacks, with Yearn's TVL plummeting from $6.7 billion in 2021 to $562 million by 2025. While Yearn Finance clawed back $2.39 million in assets post-exploit, the damage to its reputation and user trust was significant.

Yearn's responses have included asset recovery efforts and updates to affected pools, but critics argue these measures are reactive rather than proactive. The protocol's reliance on post-hoc audits and emergency patches, rather than overhauling legacy systems, raises questions about its long-term viability. As Bloomberg highlighted, the repeated exploits suggest a lack of systemic risk management in DeFi protocols that prioritize speed over security.

Assessing Investment Resilience in DeFi

For investors, Yearn's history offers critical lessons. First, the age and complexity of a protocol's smart contracts should be red flags. Legacy systems, while functional, often harbor hidden vulnerabilities that attackers can exploit. Second, the frequency of exploits-Yearn's fourth in four years-demonstrates that even well-audited protocols are not immune to systemic risks.

Investors should prioritize protocols that:
1. Retire legacy contracts in favor of audited, modular designs.

2. Implement real-time monitoring for balance discrepancies and flash loan activity.
3. Adopt formal verification and third-party audits as standard practice.
4. Maintain robust insurance mechanisms to mitigate losses.

Yearn's struggles also highlight the importance of governance transparency. Protocols that incentivize community-driven security audits and bug bounties are better positioned to identify risks early.

Conclusion

Yearn Finance's repeated exploits serve as a cautionary tale for the DeFi ecosystem. While innovation drives growth, the persistence of legacy smart contracts as systemic risks cannot be ignored. For investors, the key to resilience lies in scrutinizing not just the financial metrics of a protocol but its architectural integrity, governance practices, and commitment to security. As DeFi matures, protocols that fail to address these vulnerabilities will likely face diminishing trust-and capital.