This is why crypto thefts are becoming a bigger problem | 1/8/23

• Already stolen $1.3 billion in cryptocurrencies in the first quarter of 2022
• Theft moves to DeFi platforms
• Insufficient security of the code and lack of risk analysis on the part of investors as reasons

The analysis company Chainalysis publishes every year the “Crypto Crime Report” – a report on the crime situation in the crypto universe. The current “Crypto Crime Report 2022” shows that crime in this area has reached a new record high. In 2021, about 14 billion US dollars in cryptocurrencies were transferred to illegal addresses, more than ever before. The amount stolen through scams – such as so-called “rug pulls”, where developers for alleged projects collect funds from their victims via tokens and then disappear without a trace – increased by 82 percent year-on-year to $7.8 billion, while crypto Thefts – for example through successful hacks – increased by a whopping 516 percent to 3.2 billion US dollars. The trend towards more crypto thefts continues this year: According to “SC Media”, 1.3 billion US dollars in cryptocurrencies were stolen in the first quarter of 2022 alone.

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Hackers are increasingly targeting DeFi platforms

The nature of crypto thefts has changed over time. According to Chainalysis, centralized crypto exchanges were the main targets of thieves in 2019 and 2020, but now the vast majority of coins are stolen by hacking DeFi platforms. Of the roughly $3.2 billion in crypto thefts last year, 72 percent came from DeFi protocols, according to the blockchain research firm. According to “SC Media”, 97 percent of crypto thefts in the first quarter of 2022 were on DeFi platforms.

“There are a few things that make DeFi projects more vulnerable to hackers,” explained Kim Grauer, director of research at Chainalysis, according to MIT Technology Review. “The code is open source. Anyone can look at it and search for bugs. In our opinion, this is a big problem that does not occur with centralized crypto exchanges,” the expert continued. Thus, the main characteristic of DeFi systems, namely their transparency and their open source code, becomes their biggest problem.

In addition, more and more crypto companies are being founded, so the industry is growing very quickly. According to the “MIT Technology Review”, the focus is primarily on establishing a business quickly, and security is often neglected. Poorly managed teams using open source software are widespread in the crypto economy. Hackers would know that and take advantage of it.

Johnny Lyu, CEO of crypto exchange KuCoin, also blamed “Forbes India” on faulty code as the main reason for the increasing number of hacks on DeFi platforms. “The reason why DeFi protocols are increasingly being hacked is because of the code they are based on. The majority of hacking attacks are due to vulnerabilities in the code of the smart contracts that hackers exploit to gain access to users’ funds,” says Lyu. “The decentralized nature of the DeFi platforms makes them even more vulnerable to attack as the hackers target certain bugs in the software packages, which are very transparent as the programs are open source,” the KuCoin CEO continued.

Investors – sometimes knowingly – take big risks due to a lack of analysis

According to the “MIT Technology Review”, other reasons why the crypto industry has to constantly report new successful thefts is that investors often do not analyze the risks of their investments at all or not sufficiently. “There are so many opportunities for new businesses to come online that people are investing at an unprecedented rate, pouring money into platforms that are not particularly well structured or managed,” Chainalysis’ Kim Grauer said, according to the magazine. Additionally, it is a common investment strategy to invest in maybe 50 different protocols and tokens and hope that one of them will take off. According to Grauer, it is almost impossible to research each of these investments in advance. Investors therefore take a very high risk – and in many cases they are even aware of it, experts believe. “People are now building into their investment strategy a kind of acceptance of the risk that they can be hacked or that everything can go to zero,” said the research director.

In fact, according to MIT Technology Review, investors affected by crypto theft rarely get their money back. In the meantime, the authorities would have new tracking tools at their disposal, but their ability to secure and return the funds is very limited due to the inherent characteristics of the cryptosystem.

Editor finanzen.ch

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