Data Snacks, Member Exclusive

Data Snack: Crypto is evolving – and so are crypto scams

  • Crypto crime is a real problem that cost consumers millions of dollars in cryptocurrency last year.
  • From rug pulls to wash trading, the industry can be a quagmire for the uninitiated. But businesses like RugDoc may be able to offer some much-needed help.

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Data Snack: Crypto is evolving – and so are crypto scams

As lucrative as cryptocurrency investments may seem to be, they have historically also served as a breeding ground for scams and lost fortunes. Research by Chainalysis into illicit activities carried out through crypto points out that in 2020, $162 million worth of cryptocurrency was stolen from DeFi platforms. That was 31% of the total amount stolen that year.

However, as the chart by Chainalysis shows below, the amount of cryptocurrency stolen through a DeFi protocol grew in 2021 by a lot – 1330%, to be exact.

Annual total cryptocurrency stolen by victim type (from jan 2019 to jan 2021)

Centralized Exchange: Almost $500 Million
Defi Protocol: negligible 
Other: Negligible 

Centralized Exchange: More than $250 Million
Defi Protocol: less than $250 million
Other: Negligible 

Centralized Exchange: More than $2.25 Million
Defi Protocol: More than $2.25 Billion 
Other: $500 Million

Source: Chainalysis

Theft isn’t the end of it, though. Scams haunt DeFi protocols too. They happen so often that businesses like RugDoc have started popping up, which help consumers check the “code safety” of a DeFi product. This doesn’t mean that the tool gives investment advice, though – it simply tells you what seems suspicious.

Given the novelty of the DeFi space and the attendant lack of regulation, it remains possible for people with technical skill to create a seemingly legitimate DeFi product and get it listed on exchanges. These kinds of scams made off with $2.8 billion worth of cryptocurrency last year. 

Sadly, having your money stolen or losing your fortunes on a bogus DeFi product isn’t the only way to make a bad bet in the crypto world. The NFT space has landmines of its own.  

Drop the NFT

With the glitter of digital art and collectibles raining on the NFT space, it may become hard to look past the big sales and projected fortunes. Recent blockchain analysis shows that the industry is rife with sellers self-financing NFT sales in order to inflate sale numbers and mislead unsuspecting buyers.

To inflate their NFT sales, sellers pay wash traders beforehand with the expectation that they will make an NFT purchase. As the chart below shows, one seller made 830 such transactions last year.

Seller Number : Number of sales to self-financed addresses
	1 : 830
	2 : 475
	3 : 452
	4 :   -
	5 : 360
	6 : 322
	7 : 319
	8 : 254
	9 : 207
	10 : 203
	11 : 203
	12 : 197
	13 : 188
	14 : 184
	15 : 158
	16 : 157
	17 :   -
	18 : 137
	19 : 130
	20 : 127
	21 : 126
	22 : 125
	23 : 120
	24 : 119

Source: Chainalysis

Deeper analysis reveals that not all wash traders are created equal. Some wash traders prove to be habitual and therefore more profitable than others. Their share of profit is more than enough to make up for the underperforming part of the group. 

Types of wash traders category  No. of Addresses 	 Profits from Wash trading:  
Profitable 					110 			$8,875,315
Unprofitable  					152		 	-$416,984
All				 		262			$8,458,331

Source: Chainalysis

In reaction to the heightened vulnerability to crime in the crypto environment, businesses that seek to outpace criminals are developing in earnest. For example, RugDoc is a community-led project whose employees run KYC checks as well as review smart contracts to assign risk ratings. The company also produces guides for consumer education and updates on any exploits on their Twitter.

As important as these kinds of initiatives are for combating crime in the crypto industry, making sure consumer education can outpace influencer marketing and the virality of #Fomo is going to be a task that may need some regulatory help.

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