Although 2020 is a milestone year in the encryption field, there are also some disappointing aspects worth noting. Although virtual currencies are increasingly accepted by the mainstream, the governments of some countries are still formulating policies to inhibit innovation, which puts them at a disadvantage in the emerging digital economy.
Decentralized finance (DeFi) is the main topic of this year, and the DeFi market has not disappointed. Throughout 2020, DeFi investment has achieved substantial growth. However, scammers continue to deploy well-designed scams and use DeFi to blackmail victims.
In addition, some projects have also suffered speculative profit-making attacks, such as hackers using lightning loans and arbitrage to steal funds from liquidity pools. Although some people think that these incidents should not be called “hacking attacks,” but as participants strive to achieve the ultimate goal of financial democratization, these incidents have clearly alleviated the growing pain points in the DeFi field.
However, in 2020, cryptocurrency exchanges put large amounts of funds in fragile hot wallets. Although the number of cryptocurrency thefts has decreased significantly this year, reports of platforms being hacked, user deposits and data stolen are not less than in previous years, although these news will hardly affect the market at present.
Regarding cryptocurrency exchanges, 2020 is about to end, and some well-known platforms have not yet adopted upgrade protocols such as Segregated Witness (SegWit). The transaction fees paid by users are still higher than what they should pay, and some believe that the exchange continues to operate like an altcoin casino.
Scams in the DeFi field are increasing
In February of this year, Cointelegraph reported that DeFi was shifting from a niche market to a mainstream market. The total locked-in value of Ethereum (ETH) in the DeFi market has recently exceeded the $1 billion mark.
At present, the total locked-in value on DeFi has exceeded 14 billion U.S. dollars, and the projects and agreements that provide multiple services such as lending, derivatives, and payments are also expanding. Data from DappRadar shows that the DeFi market will grow significantly in 2020, with transaction volume on decentralized applications (DApp) increasing by 1200%.
The user retention crisis was once a major bane of DApps, but with the emergence of the DeFi “degen” (degen) culture in the second half of 2020, the user retention crisis has gradually continued The inflow of funds eased. Even decentralized exchanges have witnessed record trading volumes, especially in the third quarter of this year.
In June of this year, Compound Finance introduced liquidity mining, opening the gate of liquidity mining. When some well-known DeFi players launched projects that tried to combine several financial markets, some additional agreements appeared, using the DeFi field to deceive investors.
From meme coins to rug pull (referring to some projects defrauding users’ pledges and investments by packaging themselves, and then immediately escaping with the funds) and even malicious contract codes, scammers continue to improve their strategies and swindle more from income chasers funds. On the other hand, Automated Market Maker (AMM) Uniswap has achieved record trading volume, but a large part of this trading activity comes from “fraud coins” designed to steal funds from victims.
In fact, in several cases this year, Cointelegraph emphasized that the rising level of fraud in the DeFi field seems to obscure groundbreaking achievements in this field. According to the blockchain intelligence company CipherTrace, despite the reduction in cryptocurrency thefts in 2020, DeFi is currently the largest contributor to cryptocurrency-related crimes.
According to CipherTrace’s report, as of November, the total losses caused by DeFi hacking attacks exceeded $100 million. In addition, according to CipherTrace data, 45% of cryptocurrency hacking in the first and second quarters came from the DeFi field, and this proportion was close to 50% in the second half of this year. Malcolm Tan, the chief consultant of DeFi AMM service company KingSwap, told Cointelegraph that he was disappointed by the fraudulent activities in the field and added:
“DeFi has the potential to shake up the financial industry through digital technology, but scammers and rug-pull projects that have caused asset losses and damaged community reputation have hindered its development. These problems have been resolved and DeFi investors and users can achieve safer Only after investment can this emerging industry achieve substantial growth.”
Lightning loan attacks and direct cryptocurrency theft
As a growing market segment, it may not be surprising that some mistakes have occurred as legal DeFi projects mature. However, the regularity of lightning loan attacks and other forms of speculative profit attacks has also become a concern for the entire field during this year.
DeFi lending protocols such as MakerDAO, Compound, dYdX and bZx have all been hacked. These attackers use temporary price oracle failures or network congestion and other issues to force the liquidation of low-secured debt positions or to steal funds directly from the liquidity pool.
Piers Ridyard, CEO of DeFi Engine Radix, believes that vulnerabilities in legitimate projects are a bigger problem than scammers. He told Cointelegraph: “Obviously there are scammers in any industry. I think most of the losses are caused by the creation of DeFi. It is caused by the basic complexity in the application process.” He went on to say:
“A small, unintentional error in the code can cause millions of dollars in losses. This is not caused by a scammer; it is only caused by a developer who wants to get the product to market quickly to avoid missing opportunities. This It does not even reflect the skills of any developer, only the complexity of the code they deal with.”
In April of this year, the DeFi platform dForce suffered a $25 million hacking attack because the project failed to prevent known ERC-777 vulnerabilities. Recently, when the price of stablecoins on Coinbase reached a 30% premium, Compound Finance’s reliance on centralized price oracles caused its users to lose approximately $52 million in DAI.
In addition to these attacks, other hacking attacks have occurred in the DeFi field, some of which are “black swan” incidents, while others may recur unless mitigation measures are taken. Even the DeFi insurance agreement was not spared. Hugh Karp, the founder of Nexus Mutual, lost $8 million due to a suspected hacker.
Perhaps even more disappointing is that the communities of projects such as Maker and Compound voted against compensation for users affected by these events. On “Black Thursday” in mid-March, as the price of Ethereum fell by half, some vault owners lost all their collateral.
Overly strict cryptocurrency regulations
Although the regulatory transparency in the cryptocurrency field continues to improve this year, some governments have taken a step forward in the field of cryptocurrency supervision and took a few steps backward. Due to the EU’s strict anti-money laundering standards, some exchanges were forced to withdraw from the region because of the rising cost of compliance with these laws.
In addition, stablecoin regulations seem to be the next point of contention between cryptocurrency proponents and regulators. Almost all major intergovernmental financial institutions list stablecoins as a cryptocurrency field that requires the attention of traditional regulators.
As part of measures to resist private issuance of stablecoins, many countries are working hard to create their own CBDC (central bank digital currency). However, the consensus is that most sovereign digital currencies are nothing more than virtual appendages of legal currencies.
Some Democrats in the US Congress recently initiated a bill requiring private stablecoin issuers to hold bank licenses. In response, many people in the crypto field believe that such onerous regulation will hinder the development of crypto startups and make the stablecoin field only open to wealthy and well-known financial elites.
In November, Coinbase CEO Brian Armstrong claimed that the U.S. Treasury Department was working to extend “Know Your Customer” (KYC) verification to non-custodial wallets. This news shocked the U.S. crypto industry. Several major investors in the US crypto industry, including Jeremy Allaire, CEO of crypto payment company Circle, are already trying to discourage Treasury Secretary Steve Mnuchin from implementing such a plan.
Outside the United States, until the end of this year, the Indian government did not express any specific positions on cryptocurrency regulation. With the exception of India’s Supreme Court in March this year lifting the ban on banks from providing services to crypto exchanges in 2018, there has not been much change in the regulatory transparency of the country’s crypto industry.
Kashif Raza, the co-founder of Crypto Kanoon, an Indian blockchain-focused law firm, told Cointelegraph that the government’s failure to develop a clear legal framework for India’s cryptocurrency industry is a source of frustration among stakeholders:
“Many Indians are watching the development of the crypto field. They want to enter this field, but they are worried about the future of the Indian crypto industry. India’s chaotic regulatory status stifles the innovation of startups because it is difficult for startups to convince venture capitalists Invest in cryptocurrency. As time goes by, India is losing opportunities to develop the crypto sector.”
Exchanges are making slow progress in adopting Bitcoin upgrade protocol
In July of this year, Bitcoin consulting firm Veriphi released a report that showed that since 2017, the incompleteness of segregated witness and transaction batch processing has cost traders more than $500 million in additional transaction fees. In addition to segregated witness and transaction batch processing, many high-volume exchanges have not yet provided support for Layer 2 protocols such as Liquid sidechains and Lightning Network.
Coinbase only started adopting transaction batch processing in March of this year, and stated that transaction fees will drop by 50%. Earlier in December, Kraken, another US cryptocurrency exchange, announced plans to support Lightning Network expansion technology in 2021.
Social media comments on this topic have led people to reach a consensus: exchanges would rather become “junk coin casinos” than support important Bitcoin upgrade agreements. “Grubles” is a developer of digital asset infrastructure company Blockstream. He tweeted on the matter earlier in December. He described the exchange’s refusal to adopt the Bitcoin upgrade protocol as “a measure to promote the adoption of altcoins.” “. According to Grubles, this is to promote the use of altcoins: “Then once we have the second layer of agreement, the exchange will also delay the protocol upgrade because it will also promote the adoption of altcoins.” Samson Mow, Chief Strategy Officer, Blockstream Tell Cointelegraph:
“Most exchanges are more concerned about listing new altcoins to drive transaction volume, rather than improving Bitcoin infrastructure for users. The integration of Lightning Network and Liquid sidechains is not difficult, said Paolo Ardoino, CTO of Bitfinex, because The Liquid sidechain is similar to Bitcoin. It only took a few hours to add the Liquid sidechain. Like Segregated Witness, if something can bring benefits to users but does not bring immediate income, it will be shelved .”
Ali Beikverdi, CEO of South Korean cryptocurrency exchange bitHolla, also condemned the exchange’s inadequate adoption of the Bitcoin upgrade protocol. Beikverdi told Cointelegraph: “Bitcoin is still stuck on its current code base, with almost no new code added,” he added:
“Many new changes in taproot and schnorr signatures and many other cool features have not been added to the production software. Bitcoin was once considered an open financial protocol that defines currency, but conservative development makes it more like a Old school assets suitable for investment.”
Nevertheless, in general, 2020 is a milestone year for the crypto field. Institutional investment has flooded into cryptocurrencies, and more and more people believe that cryptocurrencies are a more mature asset class. For the crypto industry, the new year will be a crucial year, and DeFi and central bank digital currencies may be the main focus of attention. However, it is also important to remember that the crypto industry has not made breakthroughs in 2020, and perhaps we can learn from them.
