Cryptocurrency and institutional investors: A love-hate relationship
Anyone who has even the slightest interest in decentralized finance (DeFi) knows that 2020 was a big year for crypto. The total locked value of cryptocurrency skyrocketed from $646 million to $14 billion, attracting millions of new traders all over the world.
Meanwhile, 2021 has thus far been no less important: the cryptocurrency market was worth $1.6 trillion as early as February.
However, even though one can argue that cryptocurrencies are becoming more and more accessible — mainstream, even — some potential investors are still not fully convinced they should invest in DeFi. Aside from financial volatility, a big reason is security. News about hacks and scams constantly reach the front pages of news websites.
New solutions entering the market may lead to more trust, but will they be enough to entice large institutions?
Businesses and the growing interest in DeFi
With the value of most types of cryptocurrency steadily rising, more and more institutional investors are becoming interested in DeFi. For example, Tesla, MicroStrategy, Galaxy Digital, and many other companies have already heavily invested in Bitcoin.
And when you think about it, investing in crypto makes a lot of sense. Keeping in mind all kinds of taxes and storage costs, it’s cheaper and easier to invest in DeFi than, say, real estate or natural resources.
Consequently, the industry has witnessed a proliferation of crypto platforms (like Gemini, BitGo, and Sherlock by Fidelity Investments) targeted at institutional investors. Platforms like these are a huge help to the industry, as they provide a level of additional security. For example, Gemini holds the majority of funds in a cold wallet instead of storing everything online.
There are a lot of benefits of institutional attention to crypto. Major investors can increase public interest in a bigger variety of digital currencies, and a growing number of traders can lead to increased liquidity and lower volatility. Which, in turn, might make the DeFi market more stable.
However, there are certain problems the crypto market is facing. The industry as a whole still suffers from a lot of attacks like rug pulls, phishing scams, exchange hacks, and front-running, to name a few. It is estimated that blockchain hackers stole over $3.8 billion in 2020 alone.
And while an individual investor might just be willing to take the risk, institutions are less likely to take a leap of faith, as they deal with much larger sums and are held accountable for their clients’ money.
The dangers of DeFi: hacks and scams
Due to security holes of all sorts, cryptocurrency platforms occasionally get hacked, scaring off potential institutional investors.
Even though lots of efforts are put into hack prevention, hackers constantly find new (and, sometimes, downright ingenious) ways to get rich.
One of the most notable examples of this could be the hacking of KuCoin, the self-proclaimed “most advanced and secure cryptocurrency exchange”. In September 2020, it suffered a tremendous breach, losing as much as $275 million in Bitcoin and other cryptocurrencies.
The recent PAID Network hack is another instance of security holes in DeFi. On March 5, 2021, a hacker used a compromised private key to exploit a smart contract and mint more than 59 million of PAID tokens worth $166 million at the time of the attack.
This year’s March was unlucky for the DODO exchange, too. Its four crowdpools suffered from a bug exploit, as the attackers drained as much as $3.8 million in cryptocurrency.
Cases like these, together with numerous other types of attacks, make the DeFi market seem dangerous and unstable, especially to large scale investors.
What can be done about this?
As I’ve discussed in a previous article, hack prevention isn’t always effective. No matter what kind of preventive measures you take, it’s impossible to entirely stop attacks from happening.
Of course, companies should invest in good cyber security tools, patch security holes, and hire white-hat hackers who would test the impenetrability of their systems. Whereas individual users should consider using physical wallets, insuring funds, protecting devices from malware, and being more cautious about the emails or attachments they open.
However, life shows that all of this isn’t always enough, and that’s why hack mitigation should receive a lot more attention than it’s currently getting.
In short, the term hack mitigation encompasses various methods that deal with the consequences of crypto hacking, most of which include getting the money back to the rightful owner.
One of them is called Lossless, and it may leave an imprint on the whole cryptocurrency industry. That’s because this tool is able to freeze and reverse a fraudulent transaction, acting as a safety net and letting you get your money back to your account.
Trustology is another interesting platform that attempts to increase the safety of DeFi transactions. Last year, it launched a “DeFi Firewall”, i.e. a set of filters that prevents funds from going into unverified protocols.
Unfortunately, there aren’t that many hack mitigation tools available yet. Of course, services like Escrow are a huge help when it comes to making sure that both parties are executing their contract. However, these tools are not yet impenetrable.
Some final thoughts
Even though the crypto industry is headed in the right direction, it hasn’t left its Wild West stage yet, and there’s still a lot to be done about the security of crypto transactions.
In order for the DeFi market to grow even further, we are in desperate need for more hack mitigation tools like Lossless and Trustology. In this way, the crypto market will be able to attract more and more institutional investors, becoming more stable and accessible to everyone.
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