Investors lost over $12 billion in ‘DeFi’ this year, more than 80% of it due to scams and thefts

• Fraud and theft accounted for $10.5 billion, a sevenfold increase from last year

• U.S. SEC Chair Gensler described DeFi as the “Wild West” of crypto as there is no regulation in the platforms

Investors and users have lost just over $12 billion in the so-called “decentralized finance” platforms this year.

In a report published by London-based Elliptic, the blockchain analytics firm claimed that the amount stolen was due to malicious exploitation of flaws in decentralized applications (DApps) such as decentralized exchanges (DEXs), lending protocols, and asset management offerings.

These losses include direct loss of funds stolen from DApps, as well as losses suffered by holders of digital currencies associated with these protocols, the firm said.

Decentralized finance (DeFi) is a blockchain-based form of financing that aims to replicate traditional financial services without relying on intermediaries such as central banks or exchanges.

It promises users huge returns with a high-interest rate through savings and lending products as there are no middlemen.

Wild west

Earlier, U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler described DeFi as the “Wild West” of cryptocurrencies, as there is no regulation in the platforms.

Also Read: SEC Chair Gary Gensler calls on Congress to regulate crypto "Wild West"

The report said that overall losses caused by DeFi exploits have totaled to over $12 billion so far in 2021, among which fraud and theft accounted for $10.5 billion, which increased sevenfold from the last year.

In its press release, Elliptic said that mistakes in the design and development of DApps are the most common cause, which gives rise to bugs that hackers can exploit, accounting for $10.8 billion of all losses due to the untested and immature nature of the technology.

Another $1 billion losses resulted from the theft of “admin keys” and exit scams, where a DApp creator intentionally leaves a ‘backdoor’ in the code that allows them to steal users’ funds.

“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.

Also Read: SEC Chair Gensler says crypto market won’t mature without regulatory oversight

“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.”

Over the last two years, the total value locked (TVL) or the amount of money deposited at DeFi services has increased to $247 billion from just $500 million in November 2019.

Picture Credit: CNBC