Use of Decentralized Finance has been on the rise throughout 2021 with an over 9-fold increase in DeFi transactions, compared to 2020. The race to reinstate the traditional financial services in the crypto space is a rapid one. It turns out it is also very perilous for the early adopters.
2021 saw a 1330% increase in DeFi thefts compared to 2020, totalling $2.3 billion worth of stolen cryptocurrency and the latest data analysis presented by TradingPedia shows this trend is worsening.
Just in the first quarter of 2022, there have been $1.26 billion stolen from DeFi protocols. This constitutes 55% of all DeFi thefts for the entire 2021. The second quarter is also starting in a very “promising” way with the latest Beanstalk flash attack, resulting in another $182 million stolen on 17th of April by exploiting the project’s price-calculating mechanism.
Trust in DeFi starting to decline?
Based on the most recent data, the analysts at TradingPedia are concluding that 2022 will be a Make-or-Break year when it comes to DeFi:
“With the increased interest in Decentralized Finance we are also seeing an upsurge in malicious intent toward exploiting DeFi services for illicit financial gains. This upsurge is so substantial, that about 97% of all crypto stolen in Q1 of 2022 is attributed to DeFi protocols. This is leading to fear and uncertainty in existing and prospective customers, clearly indicated by the drop in new DeFi users – the first quarter of 2022 is the first to see a single-digit percentage of user growth on a quarterly basis since the “early days” of 2019.”
Central Banks are catching up
Central Banks across the world are at different stages researching, developing and even running pilots with Central Bank Digital Currencies (CBDCs). CBDCs have some major advantages over stablecoins when it comes to security and current financial systems integration:
- CBDCs have the ability to natively integrate user identity and KYC policies
- CBDCs can be integrated with existing tax and accounting systems when it comes to withholding taxes at source and doing accounts
The Central Banks seem to feel a bit late to the party and are set to catch up in 2022. The Bank for International Settlements (BIS) just held a conference on the 4th of April, named “Does safe DeFi require CBDCs?”. The speakers seemed to try and answer that question positively throughout the agenda.
“I believe the future of DeFi is intertwined with CBDCs. DeFi needs urgent drastic improvements in terms of security and CBDCs may be the framework to give DeFi legitimacy and make the regular user feel safe with their funds. This of course comes at a price – you can’t claim to be “Decentralized” when you are using a Central Bank’s digital currency. We are surely witnessing the establishment of the future digital financial system that is coming after the one we have now. I think 2022 will be one of the pivotal years in this transition.”