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DeFi fraud and theft losses reach $10.5 billion in 2021

DeFi fraud and theft losses reach $10.5 billion in 2021

As regulators hone their focus on Decentralised Finance (DeFi), new data from Elliptic reveals that just over $12 billion in losses have been suffered over the past year by DeFi users and investors.

DeFI defines a flourishing alternative financial system that replaces traditional intermediaries with software running on blockchains.

According to the Elliptic report, the prevalence of DeFi theft and crime is largely due to the untested and immature nature of the technology available. Mistakes in the design and development of decentralized apps are the most common cause, giving rise to bugs which hackers can exploit, accounting for $10.8 billion of all losses. Another $1 billion in losses are the result of exit scams (where a Decentralised App creator intentionally leaves a ‘backdoor’ in the code that allows them to steal users’ funds) and the theft of 'admin keys'.

“Decentralised apps are designed to be trustless in that they eliminate any third-party control of users’ funds”, says Tom Robinson, chief scientist at Elliptic. “But you must still trust that the creators of the protocol have not made a coding or design mistake that could lead to a loss of funds.”

This was an issue recently highlighted by Bank of England deputy governor for financial stability Jon Cunliffe who observed that the highly decentralised and global structure of the DeFi sector along with the difficulty to trace end users provide a unique set of challenges for regulators.

"Even on an initial view it is clear that the sector is opaque, complex and undertakes financial activities that carry risk - activities that are regulated with the traditional financial sector," he said. "There are pronounced market integrity challenges given the absence of investor protection, AML and other market integrity provisions."

Similar concerns were recently aired by SEC commissioner Caroline Crenshaw, writing in the International Journal of Blockchain Law, who argued that lack of transparency and psuedonymity represented critical structural problems that the DeFi community needs to address.

As Elliptic's Robinson emphasises: "We are still at the experimental stage and DeFI users face significant risks. As the technology matures and becomes better-regulated, losses will fall and DeFi will become a practical alternative to the banks, asset managers and exchanges that we currently rely upon."

Comments: (3)

A Finextra member
A Finextra member 22 November, 2021, 06:56Be the first to give this comment the thumbs up 0 likes

... but DeFi and its users are hailed by politicians for "giving the hgigh-street banks a run for their money" . 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 22 November, 2021, 13:351 like 1 like

The charter of DeFi is to sidestep regulation. The line "as the technology... becomes better regulated" sounds like an oxymoron. Wall Street is already making money out of DeFi. Expecting DeFi to be an alternative to banks, AMCs, et al, sounds out of touch with ground reality.

When regs are undergirded by such unrealistic premises, it's not surprising that they're unable to stop the next financial crisis, no matter how many GFCs have happened in the past.

Kris Vlas
Kris Vlas - http://TradeSanta.com - Boston 22 November, 2021, 14:22Be the first to give this comment the thumbs up 0 likes

crypto rime is booming on DeFi platforms.