Last year, the red hot decentralized finance (DeFi) sector was a prime target for cyber criminals whom managed to siphon billions of dollars worth of cryptocurrencies from investors, new data from blockchain data platform Chainalysis show.
Criminal crypto transactions reached an all-time high in 2021, with illicit addresses receiving a total of US$14 billion, up 79.5% from 2020 at US$7.8 billion. Of that amount, US$2.2 billion were lost to DeFi-related theft, and US$2.8 billion came from so-called “rug pulls.”
Total cryptocurrency value received by illicit addresses, 2017 – 2021, Source: 2022 Crypto Crime Report, Chainalysis
Rug pulls are a type of crypto scam in which developers build what appear to be legitimate projects before stealing investors’ money and disappearing.
Though Turkish crypto exchange Thodex’s US$2 billion loss accounted for most of the funds lost last year, major attacks involving DeFi projects were also recorded in 2021. These include for example AnubisDAO, a dogecoin-inspired crypto that managed to raise and lose about US$60 million, and Uranium Finance, a Binance Smart Chain-based DeFi exchange which lost US$50 million.
Rug pulls have risen in popularity in DeFi because of the hype surrounding the sector. Most of these DeFi projects don’t go through code audits, leaving exit codes and back doors for the developers to siphon off investors’ money, Chainalysis says.
Code audits are a process by which a third-party firm or listing exchange analyzes the code of the smart contract behind the token or protocol to make sure that the contract’s rules don’t contain mechanisms that would allow for unscrupulous developers to make off with investors’ funds.
Besides rug pulls, crypto theft including attacks involving social engineering, hacks and phishing efforts, are also increasingly targeting DeFi project. Of the US$3.2 billion worth of cryptocurrencies stolen in 2021, 72% were taken from DeFi protocols, the Chainalysis research found.
Annual total cryptocurrency stolen by victim type, 2019 – 2021, Source: 2022 Crypto Crime Report, Chainalysis
The boom of DeFi
The surge of crimes and attacks against DeFi projects and protocols comes on the back of a booming DeFi sector.
DeFi applications use blockchain technology with programmable capabilities to offer financial instruments without having to rely on intermediaries such as brokerages, exchanges or banks. These platforms and solutions allow people to lend and borrow funds from others, speculate on price movements on assets using derivatives, trade cryptocurrencies, insure against risks, and earn interest in savings-like accounts, among other things.
These platforms have skyrocketed in usage and popularity over the past two years, fueled by the crypto frenzy that saw total market capitalization soar 567% from just US$450 billion in November 2020 to nearly US$3 trillion in November 2021, data from Coinmarketcap show.
In 2021, DeFi transaction volume grew 912% in 2021, Chainalysis estimates. Today, these tokens collectively hold a market capitalization of US$135.9 billion, representing 7% of the US$1.91 trillion global crypto market, according to data from Coinmarketcap.
2021 was a blockbuster year for crypto and the broader blockchain industry, which saw companies in the space raise a record US$30 billion. The sum is nearly four times more than the previous all-time high of US$8 billion that investors poured into the crypto industry in 2018, according to Bloomberg, which cited figures from PitchBook.
Notable fundraising rounds in 2021 included a US$1 billion Series B funding round closed by crypto derivatives exchange FTX, a US$1 billion round closed by custodian New York Digital Investment Group, as well as a US$725 million fundraising closed by Forte, a provider of blockchain integration tools for game developers.
