Decentralized finance (DeFi) has had a challenging year – losing 75% of its total value locked over the last 11 months. However, while the crypto crash might have hit investors, it did not deter criminals. Bug exploits, logic faults, private key compromises and social engineering attacks broke records in 2022, stealing a record $2.7 billion from DeFi protocols.
Decentralized finance (DeFi) is an emerging financial technology that challenges the current centralized banking system. DeFi eliminates the fees that banks and other financial companies charge for using their services and promotes the use of peer-to-peer, or P2P, transactions (see DeFi Fundraising Review).
More than half of the $5.1 billion stolen overall from DeFi since 2020. Furthermore, four of 2022’s worst DeFi hacks secured their place on the list of top ten biggest crypto heists of all time.
According to Elliptic Research, from North Korean heists to US sanctions against Tornado Cash, DeFi-related crime – or “DeCrime” – has displayed new trends and behaviors throughout 2022. In this blog, Elliptic analyzes these trends, and the top five crucial insights observed throughout the year that might shed light on the biggest security risks facing DeFi in 2023.
Thefts Netted $32.6 Million per Hack on Average – Almost Double 2021’s Figure
In 2020, the average DeFi theft earned their perpetrators around $6.4 million. In 2021, that figure rose to $17 million. In 2022, that latter figure has almost doubled – with an average of $32.6 million stolen in each hack. The heaviest loss was sustained by the BSC Token Hub in October 2022, when it lost $569 million worth of cryptoassets.
Yet no single hack in 2022 has managed to surpass the record-breaking $611 million theft of Poly Network bridge in August 2021.
In another slightly conciliatory development, the number of DeFi hacks across the years have actually fallen in 2022 – with less than 90 occurring compared to more than 120 observed in 2021 (see How Much Are Crypto Criminals Laundering Using Blockchain Technology?). One hack occurred every four days on average – less than one every three days last year.
However, given the heavy-hitting nature of many of these hacks, the daily average amount taken from DeFi protocols has exceeded a record-breaking $7.6 million (see Metaverse & NFT Market Trends).
The BSC Token Hub hack, the Ronin Bridge attack ($540 million stolen), the Wormhole Bridge hack ($325 million stolen) and the Wintermute exploit ($162 million stolen) have all entered the top ten scoreboard for largest-ever crypto thefts. BSC Token Hub and Ronin are second and third, respectively (see how Investing in the Metaverse).
BSC Overtakes Ethereum as the Most Hacked Blockchain
Being the second largest blockchain in operation and accounting for the lion’s share of DeFi trading, Ethereum has long been the dominant chain for DeFi. Excluding hacks that encompassed multiple blockchains, Ethereum accounted for 56% of funds stolen in 2021.
In 2022, that figure fell to 22.4%, though this does not include the $540 million taken from the Ethereum sidechain Ronin (19.6%) during the Ronin bridge incident.
In the meantime, the Binance Smart Chain (BSC) has narrowly taken the lead, constituting 25% of funds lost to single-chain hacks. Solana has also become a frequent target, accounting for 18.6% of stolen funds (see about Insurance for Crypto Assets). As new blockchain ventures seek to challenge Ethereum’s dominance through faster transaction speeds and scalability, DeFi projects testing out their capabilities soared sharply. In many cases, security and crime-proofing considerations were slow to catch up.
For hackers – discounting Ronin – the exploit arena appears to be dominated by these three chains going into 2023.
Cross-chain Bridges Were the Biggest Casualties of the Year
Perhaps one of the most stark and clearly observed trends in 2022 was the plight of cross-chain bridges. These are services that allow users to exchange cryptoassets between blockchains – otherwise known as “chain hopping” (see about NFT Thefts and Financial Crime. Types of Scams in Non-Fungible Tokens).
Bridges have become popular for their lack of ID verification required to swap assets, which often occurs through “lock-and-mint” smart contracts.
When a user decides to convert assets, these smart contracts lock them on the initial blockchain and issue the converted amount of assets on the destination blockchain. This leads to a large amount of liquidity being locked in these smart contracts.
For criminals, a liquid smart contract is a lucrative one. Three of the four hacks described above – namely BSC Token Hub, Ronin and Wormhole – are cross-chain bridges. Significant hacks have also targeted Qubit, Harmony and Nomad bridges. Over $1.85 billion has been stolen from these services in 2022 – nearly 70% of all thefts this year. This is double the figure from 2021, where bridge attacks stole $640 million.
Another vulnerability of bridges is their existence – given the nature of their service – on smaller blockchains with relatively untested security and audit cultures. On these chains, the smart contracts operated by these bridges may therefore be more vulnerable to an attack compared to more mainstream blockchains such as Ethereum.
North Korea Stole at least $640 Million this Year, Resulting in Heavy-hitting Sanctions
One major perpetrator of DeFi thefts is the notorious “Lazarus Group” – a North Korean state hacking organization. It has been involved in many exchange and DeFi hacks in the past, and 2022 was no different.
North Korea has been attributed to at least two DeFi hacks in 2022 – those of Ronin and Harmony. As showcased above, both were cross-chain bridges. Upon attributing the Ronin bridge hack to Lazarus, the US Treasury sanctioned the perpetrating address.
Subsequently, the popular decentralized mixer Tornado Cash announced that it would implement a smart contract sanctions screening tool to prevent Lazarus from using its tool to cash out the stolen funds.
To avoid these measures, the Lazarus Group generated new intermediary addresses to send funds through Tornado Cash indirectly – leading to fresh sanctions of those addresses by the United States in an attempt to stop them from reaching Tornado Cash.
On August 8th, Tornado Cash itself was sanctioned for facilitating the laundering of almost all the Ronin funds stolen by the Lazarus Group.
According to Elliptic’s internal estimates, North Korean money laundering constituted 6.5% of ETH and USDC being processed by the mixer. Elliptic has also attributed the smaller $100 million Harmony Horizon Bridge hack in June 2022 to Lazarus – partially based on the similarity of its post-hack Tornado Cash laundering patterns.
Post-Tornado Money Laundering is Going Cross-chain and Cross-asset
Arguably the most significant sanctions development of 2022 with a nexus to DeFi – namely the sanctioning of Tornado Cash – did little to stop DeFi hacks.
October 2022 was the costliest month on record for hacks, with over $735 million in losses. Most hackers have instead switched to cross-chain and cross-asset opportunities instead for their subsequent money laundering.
This is a classic display in action of “crime displacement” theory – that criminals faced with a preventative measure will seek to commit their offenses in alternative ways not affected by that intervention.
Based on $305.8 million of Ethereum and BSC-based DeFi theft proceeds stolen and laundered since the sanctions, over 96% ($295 million) has been sent through decentralized exchanges.
These are services that allow users to convert between cryptoassets on the same blockchain. A further $2.7 million has been sent directly through cross-chain bridges to be laundered on different blockchains. Just $6.6 million – 2.1% of the theft proceeds observed – have been sent through Tornado Cash.
Initial Destination of DeFi Theft Proceeds on Ethereum and BSC Occurring After the Tornado Cash Sanctions
Together with DEXs and bridges, cross-chain and cross-asset crime account for over 97% of money laundering for DeFi after the Tornado Cash sanctions. High-profile regulators such as the Financial Action Task Force (FATF) have recognized the significance and growing urgency for virtual asset services to be equipped with cross-chain tracing capabilities. Indeed, it noted “chain hopping” as a growing area of concern in its June 2022 targeted update.
Elliptic has conducted extensive research on cross-chain crime and has identified over $4.1 billion being laundered through DEXs, cross-chain bridges and instant “coin swap” exchanges.
This figure is forecast to reach $6.5 billion by 2023 and $10.5 billion by 2025. Crackdowns on traditional laundering methods – including Tornado Cash – are one of the core drivers of this trend.
AUTHOR: Arda Akartuna – Senior Crypto Threat Analyst Elliptic