DeFi has risen into one of the hottest segments in the cryptocurrency industry, with more than $260 billion in total value locked (TVL) currently. The DeFi market is still largely unregulated and has gained the reputation as the Wild West of crypto. A new research report by crypto risk management firm Elliptic illustrates some of the pitfalls associated with the market.
Losses stemming from DeFi-related fraud and theft total $10.5 billion year-to-date. This amount is up an eye-popping 600% vs. 2020 levels of $1.5 billion. Last year, DeFi ended the year with $21.1 billion in TVL, according to DeFi Llama.
In a more top level view, DeFi market participants lost slightly more than $12 billion so far this year overall due to “the malicious exploitation of flaws” across Dapps including “decentralized exchanges (DEXs), lending protocols and asset management offerings,” according to the announcement.
Elliptic Chief Scientist Tom Robinson stated,
“The DeFi ecosystem is an incredibly exciting and fast-moving space, with financial services innovation happening at light speed. 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.”
According to the report, the culprits have been flaws in Dapps, giving nefarious actors the opportunity to exploit bugs. While decentralized apps are designed to be trustless and not require the intervention of any centralized third party, this does little good when the code has vulnerabilities.
Flawed Dapps represented $10.8 billion of the loss tally. In addition, rug pulls, or exit scams, have also been on the rise in DeFi and have tacked on another $1 billion to this year’s losses.
Despite the risks, DeFi continues to attract top-tier developers and high-net-worth investors. DeFi has already disrupted the traditional financial system, giving market participants the opportunity to generate returns from activities such as lending and borrowing, staking and yield farming.
The Bitwise management team forecasts that DeFi has only scratched the surface. They say DeFi could balloon into a $15 trillion segment in the next five-15 years if it follows in the footsteps of other disruptive technologies in which the Teslas and Amazons of the world operate.
Ethereum, which is the most popular platform for DeFi projects, currently boasts $172.5 billion in TVL and rising. The Ethereum price has been on a tear in 2021 alongside the rise of DeFi.
The Ethereum blockchain is home to popular DeFi projects such as MakerDAO for crypto lending and borrowing, exchange liquidity pool Curve Finance, and Compound, to name a few.