Decentralized Finance, or DeFi, is a term used to describe technology which aims to replicate traditional financial services using blockchain technology. While the technology is most widely associated with cryptocurrencies, the fast-moving space is also linked to a growing number of other financial services.
Large-name banks are getting involved, and DeFi exchanges are popping up at a growing rate. While a decentralized finance system promises to increase visibility and give users, not banks, control of their money, there has been increasing signs of dangers in the space.
In fact, DeFi’s losses have totaled over $12 billion so far in 2021, according to a report from London-based firm Elliptic. To make matters worse, fraud and theft accounted for $10.5 billion of those losses, seven-times the amount from 2020.
“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,” chief scientist at Elliptic Tom Robinson said in the report.
This should raise flags for regulators, who have yet to place hard restrictions on the deregulated marketplaces and sector-at-large. That should change as the amount of money being put into DeFi, and stolen, rises. In just the past two years, the total deposited in DeFi services has risen from $500 million to $247 billion, according to CNBC.
There could be changes soon though, with US regulators approving a new rule on banks to report “significant” computer security incidents within 36 hours of discovery. As more incidents are brought to the attention, it should paint a clearer picture of the present and upcoming dangers of crypto.
I also expect growing use by large financial players to increase visibility and security around the sector, with large banks in the business of protecting their money.