In 2020, Decentralized Finance (DeFi) experienced ‘rug-pulls’ in a variety of ways. The majority of frauds recorded in the crypto industry were from the DeFi sector. CipherTrace’s 2020 report on crypto crimes and money laundering shows that in 2019 and 2020, the total recorded theft, hack, and fraudulent attempts by fraudsters were close in number.

However, 2020 saw a significant reduction in the number of successful crypto frauds perpetrated by cybercriminals. This report indicates that the crypto world’s security architecture has improved dramatically as new individual and institutional investors adopt and join the digital currency market daily.

Rug-Pulls Increasing at an Alarming Rate

The cybercrime report noted that incessant but small-sized DeFi “rug pulls,” was rampant in the 2020 DeFi bullish market. About a half of 2020 crypto hackings recorded in 2020 could be traced to DeFi protocol, but a shocking 99% of the notorious frauds from mid-2020 were traceable to what is called “rug-pulls.”

A layperson may think that a rug-pull can be compared with endless frauds recorded in the 2018 Initial Coin Offering (ICO) boom. However, a rug-pull can be defined as a fraud where some investors liquidate all their DeFi pools by disposing of their tokens and rendering the rest of the tokens valueless.

In 2020, more than 17 protocols were attacked, a report that the research company, CipherTrace says testifies to the highest number of DeFi frauds to date. A typical example occurred with bZx protocols that involved some hackers stealing about 2,38p either, an equivalent of $645K then. Similarly, last year, hackers defrauded Balancer, one of the prominent DeFi protocols of nothing less than $500,000 worth of altcoins.

The number of cases is growing exponentially

An earlier report by BTCManager revealed that in 2020, there was a shocking rise in high-profile hacking of crypto exchanges. The report noted hackers defrauded KuCoin, a crypto exchange of more than $275 million crypto assets. Meanwhile, late last year, the company claimed that they had recovered about 85% of the digital assets lost to hackers earlier that year.

The amount of US dollars in DeFi is enormous and multiplying, thereby opening a new way to launder money from the financial system. This is evident in the 2020 cybercrime reports, which reveal that DeFi thefts are growing at a shocking rate.

One of the reasons DeFi protocols are easily hacked is that there has been no standard implementation of regulations in the DeFi sector. Hence, they are vulnerable to attacks as they are easily accessible by anybody, even with just a little information. This contributed to the reasons DeFi is mostly used for money laundering. But now, regulators seem to have woken up to their responsibilities as regards the DeFi security standards.

Recently, the SEC revealed that it is aware of DeFi programs that are now vulnerable to theft, hacks, and other frauds. An SEC official explained that if you are operating a system on code and you are exposing it to the wild, testing and auditing the code, doing a leer review, sharing it with others, then such programs will be vulnerable to attacks.