While 2020 was a historic year for the crypto space, there have been some notable disappointments. Despite the growing general acceptance of virtual currencies Some governments continue to develop strategies that stifle innovation and penalize their countries in the emerging digital economy.
DeFi was one of the main discussion topics of the year and the market segment did not disappoint with massive investment growth in 2020. Rogue actors continually engaged in elaborate scams and used DeFi advertisements for fleece victims.
That being said, several projects have been attacked by opportunistic speculation that took advantage of quick credit and arbitration, thereby pulling funds out of the liquidity pools. While there is an argument for not calling these events “hacks”, they do offer a taste of some of the growing problems facing the DeFi space as participants work toward the ultimate goal of democratizing finance.
In 2020, however, exchanges are leaving significant funds in vulnerable hot wallets. While crypto theft decreased significantly over the year, The reports of hacked platforms and the deposits and data of the redirected users are no less of a setback than in previous yearsalthough that news has little impact on the markets these days.
When it comes to exchanges, 2020 is drawing to a close, and some high profile platforms still need to make improvements to their protocols such as: B. Segregated Witness or SegWit. Users continue to pay more than they should in transaction fees, while some argue that exchanges continue to function like altcoin casinos.
Mount scam with DeFi
In February, Cointelegraph reported that DeFi is transitioning from a niche market to traditional market adoption. At this point, the total tied-in value of Ether (ETH) had recently passed the $ 1 billion milestone.
DeFi currently has a total value of nearly $ 14 billion. A growing number of projects and protocols offer a variety of services including loans, derivatives, and payments. In fact, the growth of the DeFi market in 2020 was so great that the volume of transactions in decentralized applications increased by 1,200%, according to DappRadar.
User loyalty, once a major nuisance for DApps, gave way to continued patronage when the DeFi culture of the “degenerate” emerged in the second half of 2020. Even the decentralized exchange saw unprecedented trading volumes, especially in the third quarter of the year.
In June, Compound Finance introduced “Liquidity Mining” and opened the floodgates for “Yield Farming”. While well-known DeFi players started projects that wanted to unite different financial markets, marginal protocols were created that benefited from the hype in the DeFi arena in order to deceive investors..
From meme coins to carpet pulls to malicious smart contract codesRogue actors have systematically evolved their strategies to divert more money away from performance chasers in the DeFi space. On the one hand, automated market makers, or AMMs like Uniswap, were seeing record volumes, but an integral part of that business has been helping these “scams” aimed at stealing funds from victims.
Indeed, in several cases during the year, Cointelegraph highlighted the increasing level of fraud in the DeFi space, which apparently threatened to dwarf the pioneering achievements of the industry. Despite the general decline in crypto thefts in 2020, DeFi is the largest contributor to cryptocurrency-related crime, according to blockchain intelligence agency CipherTrace.
The total loss from DeFi thefts in November was more than $ 100 million, according to the CipherTrace report. In addition, 45% of all crypto thefts in the first and second quarters came from DeFi, with the proportion now standing at 50% in the second half of the year, according to the crypto forensics company.. Malcolm Tan, senior advisor to DeFi KingSwap’s AMM service, told Cointelegraph that he was disappointed with the activities of fraudsters in the sector, adding:
“DeFi has the potential to shake up the financial industry through digital technology, but its progress is being hampered by scammers and rug-pull projects that lead to wealth loss and trust in the community. When these issues are resolved and DeFi investors and – If users can use their assets more securely in DeFi, this emerging industry will not be able to grow significantly. “
Rapid loan attacks and crypto theft
As a growing segment of the market, it may not be surprising to see some missteps along the way as legitimate DeFi projects reach maturity. However, The regularity of rapid borrowing and other forms of opportunistic speculative attacks has been an industry concern throughout the year.
DeFi credit protocols like MakerDAO, Compound, dYdX, and bZx suffered from all of these attacks, and the entities involved used multiple iterations of the same opportunistic exploitation vectors aimed at system failure. These attackers used topics such as temporary price oracle malfunctions or network overloads and were able to trigger the forced liquidation of poorly secured debt positions or simply exhaust the funds from liquidity pools.
For Piers Ridyard, CEO of Radix, Layer One DeFi Engine, vulnerabilities in legitimate projects are an even bigger problem for the industry than scammers, according to Cointelegraph: “While there are clearly bad players, as in any industry, I believe that most of the losses were caused by the fundamental complexity of building applications in DeFi.“He added:
“One small accidental mistake in code can create problems that result in the loss of millions. This is not a bad actor but a developer trying to get their product to market quickly so as not to miss the opportunity. It is not even a reflection of a developer’s skills, just the complexity they are dealing with. “
In April, China’s DeFi dForce platform suffered a $ 25 million hack because the project failed to protect against a known ERC-777 vulnerability. More recently Compound Finance’s reliance on centralized oracle pricing cost its users in Dai settlements approximately $ 52 million when the stablecoin price hit a 30% premium on Coinbase.
Aside from these attacks, other hacks have appeared in the DeFi room, with some being “Black Swan” events and others being more repeatable unless mitigation measures are taken. Even DeFi insurers did not escape the attack. Nexus Mutual founder Hugh Karp lost $ 8 million to a suspected hacker.
Perhaps even more disappointing, the community voted against compensation for affected users on some projects like Maker and Compound at these events. On “Black Thursday” in mid-March, some vault owners lost 100% of their collateral as the price of ether fell by half.
Suffocating regulations for the crypto sector
While more regulatory clarity has been maintained for the crypto space this year, some governments have ensured that one step forward and several steps back has been taken in the area of cryptocurrency regulation. In the European Union, stringent anti-money laundering regulations have forced some exchanges out of the region due to the increasing cost of complying with these laws.
Additionally, stablecoin regulations appear to be the next battleground between crypto proponents and regulators. Almost every major intergovernmental financial institution has identified stablecoins as the only segment of the crypto market that requires the attention of traditional lawmakers.
As part of their efforts to counteract privately issued stable coins, many countries are currently working to create their own CBDCs. However, The consensus is that most of these sovereign digital currencies are little more than virtual versions of the fiat currency.
In the United States, some Democrats in Congress recently sponsored a bill requiring private stablecoin issuers to have banking licenses. In response, Many in the crypto space argued that such onerous regulations would discourage cryptocurrency startups and would only open the stable coin field to established financial elites with deep pockets.
Coinbase CEO Brian Armstrong also rocked the U.S. crypto industry in November when he claimed the Treasury Department was working to extend “KYC” verification to unguarded wallets. Some of the key players in the US crypto scene – including Jeremy Allaire, CEO of cryptocurrency payments company Circle – are already trying to dissuade Treasury Secretary Steve Mnuchin from carrying out such a plan.
Outside the US, India will end the year without a specific government statement on cryptocurrency regulations. Aside from the Supreme Court lifting the ban on banks providing services to crypto exchanges in March 2018, little has come out of the regulatory clarity of the country’s crypto sector.
Kashif Raza, co-founder of Indian blockchain-focused law firm Crypto Kanoon, told Cointelegraph that the country’s government’s failure to formulate a clear legal framework for the crypto sector is a source of frustration for stakeholders:
“A lot of people in India are watching this space grow from the horizon. They want to enter this space, but are concerned about the future of cryptocurrencies in India. The confusing level of regulation in India is killing innovation in the space of startups as it does for startups It is very difficult to convince a venture capitalist to invest in the crypto space. Every day that goes by, India is missing out on an opportunity in this space. “
Bitcoin extension protocol exchange is slow
In July, consulting firm Bitcoin Veriphi released a report that showed that SegWit’s incompleteness and the introduction of batch transactions had cost merchants more than $ 500 million in additional trading fees since 2017. Aside from SegWit and the bundling of transactions, many high volume exchanges do not yet offer support for Layer 2 protocols such as the Liquid Sidechain and the Lightning Network.
Coinbase only introduced “batching” in March. The company said that usage fees would decrease by 50% after switching. In early December, Kraken, another US exchange, announced plans to support Lightning Network’s scalability technology in 2021.
Social media comments on the subject provide the consensus that exchanges would rather be “shit casinos” than support major improvements to Bitcoin. In a tweet on the subject at the beginning of December, “Grubles”, a developer at Blockstream – a digital asset infrastructure company – reported characterized the situation of exchanges blocking Bitcoin improvements, such as the “Go-to-Move-Altcoiner”. According to Grubles, this is done to to press People towards altcoins: “As soon as we get shift 2, pull your feet because that drives people towards altcoins too.” Samson Mow, Blockstream’s chief strategy officer, told Cointelegraph:
“Most exchanges are more concerned with listing new altcoins to increase volume than improving Bitcoin infrastructure for their users. Lightning and Liquid integration isn’t very difficult, and Paolo Ardoino, CTO of Bitfinex, only has it It took a couple of hours to add Liquid due to its similarity to Bitcoin. As with SegWit, it takes a back seat when something benefits users but doesn’t generate immediate revenue. “
Ali Beikverdi, CEO of the South Korea-based exchange deployment service bitHolla, also condemned the lack of widespread adoption of Bitcoin enhancement protocols. “”Bitcoin is stuck with its current code base and very little has been added“Beikverdi said to Cointelegraph, adding:
“Many of the new changes with taproot, signature schnorr, and many other great features haven’t been added to the production software. It used to be believed to be an open financial protocol defining money, but the conservative pace has made it one.” Old school asset for investment only. “
That said, 2020 was an overall milestone for the crypto space, with a flurry of institutional investment and a growing sense that cryptocurrencies are a more mature asset class. The new year promises to be a pivotal year for the industry, with DeFi and central bank digital currencies likely to take center stage. However, it’s also important to remember how the cryptocurrency industry failed to make certain breakthroughs in 2020, and perhaps learn a lesson from them.