Decentralized Finance (DeFi) investment fraud and theft has surpassed $ 10.5 billion so far this year, an increase of 600, according to a report released by crypto risk management firm Elliptic. % of all of 2020. DeFi is an automated method of banking and financing that works on blockchain-based computer programming. It provides faster and cheaper cryptocurrency transactions anywhere in the world without a financial representative, credit check, or loan officer in the middle. As of this writing, more than $ 106 billion in funds are currently invested in various DeFi offerings, up from $ 12.4 billion invested just a year ago.
Main weaknesses of DeFi
The Elliptic report found that DeFi’s main vulnerabilities were programming design flaws that produced software bugs exploited by hackers, as well as outright thefts from âtrustedâ founders and developers who turned themselves around. proven to be counter-crypters. “Decentralized applications are designed to be trustless in that they eliminate third-party control over user funds,” Tom Robinson, chief scientist at Elliptic, said in a statement. “But you still have to believe that the creators of the protocol didn’t make any coding or design errors that could result in a loss of funds.”
DeFi is not unique in risk exposure
It should be noted that, as DeFi and crypto in general are just starting to take hold, these technologies should not be seen as more susceptible to fraud. Earlier this month, the Federal Reserve’s San Francisco branch posted a blog post on its website that cited a report from Javelin Research that indicated that total combined fraud losses reached $ 56 billion in 2020, the identity fraud representing $ 43 billion. Again, DeFi isn’t unique in its risk, it’s just the latest high-level target.
âWe are still in the experimental stage and DeFi users face significant risks. As technology matures and becomes better regulated, losses will decrease and DeFi will become a convenient alternative to the banks, asset managers and exchanges that we currently rely on, âsaid Robinson.
DeFi defensive measures to be taken
By definition, decentralized finance gives you the responsibility of managing and protecting your money. Here are some common sense steps you can take when considering DeFi options:
- Only consider projects that have a proven and published track record of incremental upgrades and developments spanning multiple years.
- Look for DeFi projects that regularly run âbountiesâ where they pay outside programmers and âgood guysâ to pressure test their computer code to harden it against real threats.
- Only trust projects with founders who have been in the crypto space for years with a good reputation in different companies.
- Invest only in what you know. If you don’t understand cash pools, market makers, yield farming, or other elements of DeFi, stay away until you educate yourself.
Despite DeFi’s specific challenges outlined in Elliptic research, all investments are exposed to potential risk, loss, and theft. Whether you invest in DeFi, derivatives, or diamonds, your best defense is a balance between being smart and being careful. If you don’t take a smart and careful approach with your investments, your investments are unlikely to be yours for very long.