How cryptocurrencies are losing money

The year 2020 has been a “big year” for decentralised finance, with many of the trend’s projects experiencing strong growth. The summer was a particularly active period here, which is now even referred to as the “summer of decentralised finance”. All because of the incredible increase in coin values of various projects. Because of this, many investors made excellent profits in relatively short periods of time.

As an example here, we can remember the Yearn Finance project, which allows earning from providing liquidity in automatic mode. Here’s a chart of the cryptocurrency rate from when it appeared on the Coingecko platform to its local high on September 13, 2020. The index rose from $790 to $43,337 in two months.

Chart of the YFI exchange rate in summer 2020

As we’ve already noted, DeFi is a decentralised alternative to the traditional banking system, so it’s no surprise that the trend has attracted huge amounts of investor money.

But where there is a lot of capital, there are bound to be crooks too. By June 2020, the total losses from their activity had reached the billion-dollar level. In the months that followed, decentralised finance grew in popularity, and in proportion to that growth, the losses of those affected by hackers increased. Elliptic experts described the problem with the following quote.

Many of these projects are start-ups with relatively low levels of cybersecurity. And the irreversible nature of cryptocurrency transactions makes it very difficult to recover lost funds. This has made DeFi an attractive target for attackers.

Note that the security of many projects does suffer. Often, some of them are launched hastily due to favorable market conditions or other similar factors, which can have a good effect on the new cryptocurrency's exchange rate. Well, the rush becomes the cause of problems on a larger scale.

The volume of blockchain funds in DeFi-protocols

As an example, we can recall the ranking of the Rekt platform, which captures hacking moments in the cryptocurrency niche. This is what the top ten largest hacks look like. It is worth noting that most of the projects here do represent the decentralized finance niche.

Ranking of hacked projects in the blockchain and cryptocurrency industry

It's worth mentioning here that the biggest hack of the $611 million Poly Network ended positively. In particular, the hacker recovered all the money and thus clearly hinted to the developers about the importance of project security. Read more about the logic of his actions in a separate article.

Apart from the usual hacker attacks, a lot of money was also lost in projects that were originally created by scammers. Still, it is quite easy for a startup creator to steal funds from a DeFi protocol in which he left a “loophole” for himself. This is not even a fraudulent ICO, where the attackers still have to try and attract funds from their victims.

Of the aforementioned total losses, $8.6 billion has fallen into the hands of scammers from DeFi-based Ethereum protocols. Altcoin is the basis for a huge number of DeFi startups, although many interesting projects have been created this year on other large blockchains like Solana, Avalanche and Binance Smart Chain.

According to Elliptic’s research, users should be most concerned about decentralised lending protocols that allow people to borrow cryptocurrency from pools. More than a third of all funds have been lost in them this year, with these protocols also vulnerable to holes in the software code and financial manipulation like instant loans.

Hacker

How do you keep yourself safe from scammers? First, you need to carefully study the project and its metrics, and it is advisable to invest where there is a presence of large and well-known investors. Second, don’t forget about the risks: DeFi is still a relatively new trend in the crypto market, so messing with it with most of your capital is quite dangerous. In the end, however, it all comes down to diversification of the investment portfolio and risk management.


We think the decentralised finance niche really deserves the attention it is getting at the moment. Yet it can provide the equivalent of banking services on a decentralised basis - and do so for anyone from any country and at any salary level. All the user needs in this case is a cryptocurrency wallet and a small amount of coins on it.

Well, the large user losses are due to the niche's youth and the developers' haste. We want to believe that in the future the amount of lost money will be much less.


Look for even more useful information in our millionaires’ cryptochat. There we will discuss other important news related to blockchain and decentralisation.