Investors Have Lost $12 Billion This Year in DeFi Products and Services: Report

A representation of the virtual cryptocurrency Ethereum is seen among representations of other cryptocurrencies in this picture illustration taken on June 14, 2021. (Edgar Su/Illustration/Reuters)

Investors have lost billions of dollars this year due to theft and fraud among criminals targeting decentralized finance (DeFi) products and services, according to new research by Elliptic.

The London-based firm, a leader in crypto-asset risk management, released the report titled, “DeFi: Risk, Regulation, and the Rise of DeCrime,” on Thursday. 

Elliptic found that more than $10 billion worth of user funds have been stolen in cases of fraud and theft on DeFi products, the ecosystem of cryptocurrencies, exchanges, and shadow banks that aim to recreate traditional financial services using blockchain technology.

Specifically, DeFi users and investors have suffered more than $12 billion in losses due to theft and fraud, and those losses are only accelerating, with losses totaling $10.5 billion in 2021 to date, up from $1.5 billion in 2020, as per the research.

Owing to the relatively new underlying technology used in DeFi, criminals are able to hack in and steal users’ funds, while the deep pools of liquidity also allow criminals to launder proceeds of crime such as ransomware and fraud, leaving few traces, Elliptic found.

Bugs in code and design flaws can also be exploited by third parties, allowing criminals to target DeFi sites, the report said. Meanwhile, scams, such as “rug pulls,“ like the one reportedly used in the collapse of the popular cryptocurrency known as ”SquidGame Cash“ or ”SQUID” earlier this month, are also common.

The figures lay bare the risks in the fast-growing but still predominantly unregulated area of cryptocurrencies.

DeFi platforms allow anyone with an internet connection to lend, borrow and save—usually in cryptocurrencies—and are largely maintained by their users, meaning they bypass the traditional tightly controlled infrastructure typically associated with banks.

DeFi is increasingly becoming a significant part of the financial system and tens of billions of dollars worth of crypto has flowed through such applications.

Over the last two years, the total amount of money deposited at DeFi services has spiked from just $500 million to $247 billion, according to Elliptic, while monthly trading volumes on decentralised exchanges (DEXs) have surged by more than 1,500 percent over the past year, to more than $300 billion each month.

Backers say the technology offers cheaper and more efficient access to financial services, especially given the promise of high returns on savings amid historically low or sub-zero interest rates in typical banks. But opponents argue that, given the lack of regulation, DeFi services pose significant risks.

“The DeFi ecosystem is an incredibly exciting and fast-moving space, with financial services innovation happening at light speed,” said Tom Robinson, chief scientist at Elliptic.

“This is attracting large amounts of capital to projects that are not always robust or well-tested. Criminal actors have seen the opportunity to exploit this.”

In the United States, regulators have taken a proactive approach to scrutinizing the decentralized finance industry and have proposed a number of regulatory models to address the various risks they may pose.

The U.S. Securities and Exchange Commission (SEC) is currently investigating Uniswap Labs, the main developer behind one of the world’s largest cryptocurrency exchanges, Uniswap, in an attempt to better understand how investors use the exchange and how it is marketed, the Wall Street Journal reported.

The Epoch Times has contacted Uniswap for comment.

Meanwhile, the Financial Action Task Force (FATF), a global anti-money laundering watchdog, recently issued a new update to its 2019 guidance on cryptocurrencies, urging countries to identify persons “who maintain control or sufficient influence in the DeFi arrangements.”

“Countries should monitor for the emergence of risks posed by DeFi services and arrangements in such situations, including by engaging with representatives from their DeFi community. Countries should consider, where appropriate, any mitigating actions, where DeFi services operating in this manner are known to them,” the updated guidance states.