Decentralized finance (DeFi) fraud has skyrocketed from $1.5bn in 2020 to $10.5bn in 2021, according to a report by Elliptic.
With the sector accounting for $250bn in total assets, this is not a negligible number. It means that 4.2% of those funds have been cannibalized by various schemes, rug pulls and other dishonest methods to swindle investors.
Elliptic report hot off the press today, revealing #DeFi users and investors has suffered more than $12 billion in losses due to theft and fraud! 📰📣
— elliptic (@elliptic) November 18, 2021
The number of frauds has been exponentially growing. For reference, in June 2020, the number of frauds was just $1bn.
Elliptic gave several reasons why this may be happening. One, was the increased use of such protocols and, the other, the increase in the value of the underlying coins which have become more attractive to third parties.
A growing appetite for DeFi solutions by Ethereum-powered solutions such as Solana and Binance Smart China has also created conditions in which hackers are trying to thrive.
The report said that such new enterprises often failed to account for all risks. “Many are startups with relatively immature cybersecurity, and the irreversible nature of crypto transactions make it very challenging to recover these funds. This has made them tempting targets for attackers ranging from lone hackers to nation states.”
Mistakes in the crypto space aren’t necessary intentional. But there have been numerous weaknesses identified in both Ethereum and Bitcoin networks. The two solutions have been around for decades but still have flaws.
Ethereum most recently patched up a crucial vulnerability in its offer in August, saving users from a catastrophic event.
Elliptic chalked up $2bn to direct thefts from applications and another $10bn is reported to have been syphoned off through thefts and other fraudulent activities.
In the report, Elliptic issued some general guidelines consumers may follow to try and comply with the challenges of a DeFi space.
According to the security firm, the best way to do this is to be wary of platforms that allow people to borrow cryptocurrency from pools of peers.
The firm explained that those firms are usually susceptible to hacking attempts due to poor coding. Another issue is over-borrowing from a fund that then never gets reimbursed. The company similarly cautioned not to trust overnight platforms and engage with risky investments at the prospect of delivering quick profit.