DeFi on the ropes as digital thefts double

With a record $1.26 billion in cryptocurrency stolen from decentralized finance (DeFi) protocols in the first three months alone, this year could be a make-or-break one for the digital coins, according to fresh research by TradingPedia.

The recent surge in thefts is equivalent in value to 55% of all DeFi currency stolen in 2021, suggesting that the ugly trend has more than doubled in a few months and giving crypto-investors around the world serious reasons to pause for thought.

And judging by other data revealed by the analyst, that is just what they are beginning to do – the first quarter of 2022 was also the first since 2019 to see just single-digit percentage-point growth in DeFi users. To put this in perspective, the previous quarter saw new users jump by a staggering 24.32%.

“We are seeing an upsurge in malicious intent toward exploiting DeFi services for illicit financial gains,” said Brian McColl, technical analysis expert at TradingPedia, adding that about 97% of all crypto stolen this year had been attributed to DeFi protocols.

“This is leading to fear and uncertainty in existing and prospective customers, clearly indicated by the drop in new DeFi users,” he added.

DeFi had been enjoying a meteoric rise last year, with transactions increasing nearly tenfold on 2020 levels – until malicious hackers arrived to spoil the party.

Investor confidence is unlikely to be restored by their latest exploit, which saw Beanstalk – a stablecoin issuer pegged to the US dollar but based on the open-source blockchain Ethereum – bilked out of $182 million after its price-calculating mechanism was hacked on April 17, causing it to lose parity with the greenback.

State succor?

Faced with such mounting problems, DeFi must look to the state as an ally rather than an unwelcome interference, said McColl. Specifically, he believes central bank digital currencies (CBDCs) – already being trialed in China and mooted by the US – could help to protect the young industry against the bad actors preying on it.

“I believe the future of DeFi is intertwined with CBDCs,” he said. “DeFi needs urgent drastic improvements in terms of security, and CBDCs may be the framework to give DeFi legitimacy and make the regular user feel safe with their funds.”

But he acknowledged that the obvious contradiction between decentralized and centralized forms of digital currency would fundamentally alter the nature of DeFi, until now celebrated as a way of accessing the benefits of money without state control.

“This of course comes at a price – you can’t claim to be ‘decentralized’ when you are using a central bank’s digital currency,” said McColl. “We are surely witnessing the establishment of the future digital financial system. I think 2022 will be one of the pivotal years in this transition.”