DeFi fails to live up to its promise as fraud and theft at DeFi platforms totaled $10.5 billion so far in 2021, research shows

Decentralized finance (DeFi) has been hailed as a new way for users to lend, borrow and save while bypassing traditional gatekeepers of finance such as banks and government regulations. DeFi is built on the premise that the technology will potentially eliminate financial middlemen by utilizing smart contracts to run code that governs the rules between two counterparties. Backers of the technology say DeFi offers cheaper and more efficient access to financial services.

The goal of DeFi is to create a decentralized financial system that is not controlled by a single entity and also enables crypto-denominated lending outside of traditional banks. Ultimately, the mission of DeFi is to fulfill the aspiration for blockchain and cryptocurrency to provide self-sovereign democratization of finance.

As it turns out, however, DeFi has not lived up to its promise. Just like everything with no check and balance, DeFi has led to billions of dollars in fraud, security issues, and chaos ensues as organizations are given free rein. New research showed that fraud and theft at DeFi platforms have totaled $10.5 billion so far this year, according to a report from Reuters. The research further lays bare the risks in the fast-growing tech space but still a mostly unregulated area of cryptocurrencies.

As may you recall back in August, cyber hackers stole $600 million in the biggest DeFi hack ever reported.  The interoperability protocol PolyNetwork was exploited on Binance Smart Chain, Polygon, and Ethereum. The perpetrators have set a record within the decentralized finance space by swiping more than $600 million from at least three wallet addresses.

However, fraud and thefts have not stopped investors from pouring billions of dollars into the unregulated space. With historically low or sub-zero interest rates, are drawn to DeFi because of the promise of high returns on savings.

As Reuters further reported, citing London-based blockchain analytics firm Elliptic, crime is booming in the mostly unregulated sector. “Users have suffered over $12 billion in losses through crime at DeFi apps, lending platforms and exchanges since 2020, with the majority of losses coming in 2021 alone.”

Bugs in code and design flaws allow criminals to target DeFi sites, Elliptic found, with deep pools of liquidity also allowing criminals to launder proceeds of crime while leaving few traces. Scams are also common, it added.

Elliptic is right. As we reported back in October, a DeFi bug accidentally gave $162 million to users. Some experts, including a core developer at DeFi platform Yearn, said the bug led to the biggest-ever fund loss in a smart contract incident, but investors, for their part, don’t seem to care all that much.

“Decentralised apps are designed to be trustless in that they eliminate any third-party control of users’ funds,” said Elliptic’s Tom Robinson. “But you must still trust that the creators of the protocol have not made a coding or design mistake that could lead to a loss of funds.”