As regulators intensify their scrutiny of Decentralised Finance (DeFi), recent data from Elliptic indicates that DeFi users and investors have incurred losses exceeding $12 billion over the past year.
DeFi represents a burgeoning alternative financial system that eliminates traditional intermediaries, relying instead on software running on blockchains. The Elliptic report highlights that the high incidence of theft and crime in the DeFi space primarily stems from the untested and immature nature of the technology. Most losses—approximately $10.8 billion—are attributed to design and development errors in decentralized applications (dApps), which create vulnerabilities that hackers can exploit. An additional $1 billion in losses results from exit scams, where dApp creators leave intentional vulnerabilities in the code to misappropriate users’ funds, as well as the theft of ‘admin keys’.
“Decentralised apps are intended to be trustless, eliminating third-party control over users’ funds,” explains Tom Robinson, chief scientist at Elliptic. “However, users must still trust that the protocol creators have not introduced coding or design flaws that could lead to fund loss.”
These concerns were echoed by Jon Cunliffe, deputy governor for financial stability at the Bank of England, who noted that the highly decentralized and global nature of the DeFi sector presents unique challenges for regulators, particularly in tracing end users. “The sector is clearly opaque and complex, engaging in financial activities that pose risks similar to those in the traditional financial sector,” he stated. “The absence of investor protection and anti-money laundering provisions raises significant market integrity issues.”
SEC commissioner Caroline Crenshaw recently expressed similar concerns in the International Journal of Blockchain Law, arguing that the lack of transparency and the pseudonymous nature of DeFi pose critical structural challenges that the community must address.
Robinson underscores the need for caution: “We are currently in an experimental phase, and DeFi users face substantial risks. As the technology evolves and regulatory frameworks improve, it is likely that losses will decrease, positioning DeFi as a viable alternative to traditional banks, asset managers, and exchanges.”