Crypto thefts are on the rise – the reasons

Already stolen $1.3 billion in cryptocurrencies in the first quarter of 2022
Theft is shifting to DeFi platforms
Insufficient security of the code and lack of risk analysis by the investors as reasons

The analysis company Chainalysis publishes the “Crypto Crime Report” every year – 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, around 14 billion US dollars in cryptocurrencies were transferred to illegal addresses, more than ever before. The amount stolen through fraud – such as so-called “rug pulls”, in which developers collect funds from their victims for alleged projects via tokens and then disappear without a trace – rose by 82 percent compared to the previous year to 7.8 billion US dollars, 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 is continuing in the current year: according to “SC Media”, USD 1.3 billion in cryptocurrencies were already stolen in the first quarter of 2022 alone.

Hackers are increasingly targeting DeFi platforms

The nature of crypto theft 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 being 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 analysis firm. According to “SC Media”, in the first quarter of 2022, 97 percent of crypto thefts 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 errors. In our view, this is a major problem that centralized crypto exchanges do not have,” the expert continued. Thus, the main characteristic of DeFi systems, namely their transparency and 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 company quickly, and security is often neglected. Poorly managed teams using open source software are rampant in the crypto economy. Hackers would know that and take advantage of it.

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

Investors – sometimes consciously – take big risks if there is a lack of analysis

According to “MIT Technology Review”, another reason 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 only insufficiently. “There are so many opportunities for new businesses to get online that people are investing at an unprecedented rate and pouring money into platforms that aren’t particularly well structured or managed,” Chainalysis’ Kim Grauer said, according to the magazine. In addition, 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 carefully examine each of these investments beforehand. Investors are therefore taking a very high risk – and in many cases they are even aware of it, the expert believes. ‘People are now building into their investment strategy a kind of acceptance of the risk that they could get hacked or that everything could go to zero,’ said the research director.

In fact, according to MIT Technology Review, investors affected by a crypto theft rarely get their money back. In the meantime, authorities would have new tracing tools at their disposal, but their options for securing and returning the funds were very limited due to the intrinsic properties of the crypto system.

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