DeFi Regulation: Threats and Protection

Introduction

The decentralized finance (DeFi) sector continues to grow rapidly, offering users new opportunities for earning and asset management. However, risks are growing alongside it: hackers, scammers, and regulatory bodies are increasingly focusing on this fast-evolving industry. In 2024 alone, according to Chainalysis, hackers stole over $2.2 billion from cryptocurrency platforms, with a significant portion attributed to DeFi protocols, highlighting the vulnerability of such systems.

In an environment of tightening regulations, such as the SEC's actions against the Rari Capital platform, and a rising number of attacks, it is crucial to understand not only the primary threats but also ways to prevent them. In this article, we will examine the key risks associated with using DeFi platforms and provide practical recommendations for protecting your assets.

Key DeFi Threats

1. Smart Contract Exploits

Smart contracts are the foundation of DeFi protocols, but they are often targets for attacks. Coding errors or insufficient audits can lead to fund drains. An example is the 2019 Upbit breach, where 342,000 ETH (approximately $50 million at the time) was stolen.

2. Phishing Attacks

Malicious actors create fake websites or wallets to gain possession of your private keys.

3. AML/Sanction Risks

The use of so-called "dirty crypto" associated with illegal transactions can lead to account freezes or even criminal liability. For example, wallets flagged with sanction labels are automatically blocked on a number of platforms.

4. Regulatory Threats

Actions by bodies such as the SEC can lead to the freezing of assets or the forced registration of platforms as exchanges, which reduces their accessibility and liquidity.

How to Protect Yourself?

Verify Addresses Before Transferring

Before sending funds, ensure that the wallet address is not associated with suspicious transactions. To do this, use blockchain analytics tools like Chainalysis or Crystal. This allows you to detect sanction labels and reduce the risks of interacting with compromised addresses.

Use Cold Wallets

For storing large amounts, use hardware (cold) wallets. They are protected from online threats and minimize the risks of hacking. As the Upbit case showed, cold storage could have prevented the drain of funds.

Asset Diversification

Do not keep all your funds in a single protocol. Spreading assets across multiple projects will reduce potential losses in the event of an attack on one of them.

AML Screening and Monitoring

Check the origin of your assets. For large transactions, use AML screening services to avoid dealing with "dirty crypto."

Research the Platform

Before investing, check the project's reputation:

• Existence of smart contract audits
• The history of the developers
• Financial transparency

Legal Awareness

Ensure that the tokens you use comply with the laws of your country. For example, tokens classified as securities may require registration, which increases regulatory risks.

Use Multi-Signatures

To increase transfer security, use multi-signature (multi-sig) wallets. This protects against unauthorized access.

Conclusion

Protecting assets in DeFi requires a comprehensive approach. Researching platforms, using monitoring tools, and maintaining a cautious attitude toward risk are key elements of a successful strategy. Follow the principle: "Trust, but verify." Regular wallet checks, asset diversification, and the use of cold wallets will help minimize risks and keep your funds safe.

We recommend checking your wallet through analytical services to avoid interacting with suspicious addresses.
For a deeper analysis of regulatory threats, read our material:
SEC Letter: How to Protect Your Project from Regulatory Risks.