In its research on Web3 Safety & Compliance, published ahead of its Web3 report, US-based blockchain data platform Chainalysis revealed that illicit DeFi transactions has risen steadily over the last three years in terms of both raw value and also as a share of all transaction value.
The value stolen from DeFi protocols has been trending up since the beginning of 2021, reaching its highest-ever levels in Q1 2022, driven by hacks of the Ronin Bridge and Wormhole Network, the report detailed.
It also highlighted that these increases happened particularly in two areas: theft of funds through hacking and abuse of DeFi protocols for money laundering.
“While cryptocurrency-based crime remains an important problem to solve, especially given that rising overall transaction volumes mean the raw value of illicit transactions is still growing, illicit activity has become a less prominent part of the overall cryptocurrency ecosystem over the last three years. However, DeFi specifically appears to be going through the same growing pains that cryptocurrency as a whole was previously, with illicit activity rising over the last two years,” the research stated.
It further explained that DeFi protocols have accounted for an ever-growing share of all funds stolen from cryptocurrency platforms since the beginning of 2020 and lost the vast majority of stolen funds in 2021. As of May 1, DeFi protocols account for 97 per cent of the US$1.68 billion worth of cryptocurrency stolen in 2022.
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Who is behind all of these criminal activities? According to the research, a significant number of crypto stolen from DeFi protocols had gone to hacking groups associated with the North Korean government. This was the situation even in 2022 when the North Korean hackers had stolen over US$840 million –and the research did not shy away from the possibility that these groups were also responsible for hacks on other platforms.
DeFi and financial crimes
Another form of crime activities that had been reported to affect DeFi protocols are money laundering. Interestingly, the research once again dubbed the North Korean hackers as the culprit behind it.
An example of this crime activity happened in 2021 when Lazarus Group used several DeFi protocols to launder funds after stealing more than US$91 million worth of cryptocurrency from a centralised exchange.
“So far in 2022, DeFi protocols have become the biggest recipient of illicit funds, taking in 69 per cent of all funds sent from addresses associated with criminal activity, compared to 19 per cent in 2021. One reason for this is that DeFi protocols allow users to trade one type of cryptocurrency for another, which makes it more complicated to track the movement of funds — but unlike centralised services, many DeFi protocols provide this ability without taking KYC information from users, making them more attractive to criminals,” the research explains.
Another type of criminal activity that the research highlighted was wash trading. It is defined as a form of market manipulation in which a seller is on both sides of a trade or selling an asset to themselves in order to create a misleading perception of that asset’s value or liquidity.
Another form of wash trading were performed in order to collect reward tokens given out by NFT marketplace instead of inflating the value of any particular NFT.
“Wash trading is relatively easy to do with NFTs as some NFT trading platforms allow users to trade by simply connecting their wallets to the platform, with no need to identify themselves. One user could easily control multiple wallets and trade NFTs between them, and no one could know unless they took the time to analyse the wallets’ transaction histories,” it explains.
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“This type of wash trading scheme isn’t victimless. For one, the NFT marketplace is being tricked into paying out rewards for phoney activity. NFT collectors throughout the market are also potentially being tricked into thinking that this NFT marketplace has more transaction activity than it really does, and the same goes for the NFT collection the wash traders are using for their transactions.”
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