Scammers in the Crypto Space Stole a Record $14-billion in 2021

New data from blockchain analytics firm Chainalysis shows that crypto scammers stole a record $14 billion in cryptocurrency in 2021, this is thanks in large part to the rise of decentralized finance (DeFi) platforms.

Scamming was the greatest form of cryptocurrency-based crime in 2021, followed by theft — most of which occurred through the hacking of cryptocurrency-based businesses. Theanalytics firm says that DeFi is a big part of the story for both, in yet another warning for those dabbling in this emerging segment of the crypto industry. Losses from crypto-related crime rose 79pc from a year earlier, driven by a spike in theft and scams.

Chainalysis wrote in its annual Crypto Crime report: “DeFi is one of the most exciting areas of the wider cryptocurrency ecosystem, presenting huge opportunities to entrepreneurs and cryptocurrency users alike. But DeFi is unlikely to realize its full potential if the same decentralization that makes it so dynamic also allows for widespread scamming and theft.”

DeFi

What is DeFi? This is a rapidly exploding sector of the crypto market that looks to cut out middlemen, such as banks, from traditional financial transactions, like securing a loan. With DeFi, banks and lawyers are instead replaced by a programmable piece of code called a smart contract. This contract is written on a public blockchain, like Ethereum or Solana, and it only executes when certain conditions are met, thus negating the need for an intermediary.

“The financial system is basically sending money around with various terms and conditions attached to it,” said Joey Krug, chief investment officer at Pantera Capital, a cryptocurrency and blockchain-focused asset manager.

DeFi transaction volume grew 912pc in 2021, according to Chainalysis stats. Impressive returns on decentralized tokens like Shiba Inu also spurred a feeding frenzy among DeFi tokens.

As expected, there are a lot of red flags when it comes to dealing with DeFi. According to Kim Grauer, Chainalysis’ head of research, many of the new protocols being launched have code vulnerabilities that hackers are able to exploit.21pc of all hacks in 2021 took advantage of these code exploits.

While there are third-party firms that perform code audits and publicly designate which protocols are secure, Grauer says that many users still opt to work with risky platforms that bypass this step if they think they can get a large return. Cryptocurrency theft rose 516pc from 2020, to $3.2 billion worth of cryptocurrency. Of this total, 72pc of stolen funds were taken from DeFi protocols.

Also Read: Crypto Heist: Founders of South Africa’s Africrypt Vanish With $3.6bn Bitcoin

Losses from scams climbed 82pc to $7.8 billion worth of cryptocurrency which more than $2.8 billion of this total came from a relatively new but very popular type of scheme known as a “rug pull,” in which developers build what appear to be legitimate cryptocurrency projects, before ultimately taking investors’ money and disappearing.

“Given the hype around DeFi, people may have been more OK with using less secure platforms due to a fear of missing out on potential gains,” explained Grauer.

While Crypto-related crime may be at an all-time high, researchers note that the growth of legitimate cryptocurrency usage far outstrips the growth of criminal usage.

Transactions involving illicit addresses represented an all-time low of just 0.15% of the $15.8 trillion in total crypto trade volume in 2021. The research firm identifies illicit funds based on their connection to confirmed illicit activity. For example, funds would be considered illicit if they were sent to or from a darknet market, or were known to have been stolen in a hack.

“The fact that the increase was just 79% — nearly an order of magnitude lower than overall adoption — might be the biggest surprise of all,” Chainalysis wrote. “Crime is becoming a smaller and smaller part of the cryptocurrency ecosystem,” continued the report.

“Crime is becoming a smaller and smaller part of the cryptocurrency ecosystem.”

Chainalysis