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Cryptoverse: A mixer with your crypto cocktail?
Representations of cryptocurrencies are seen in this illustration, August 10, 2022. REUTERS/Dado Ruvic/Illustration
Aug. 23 (Reuters) – The DeFi dream has been shaken. And touched.
The major crypto project has declined in 2022: total user funds invested in decentralized finance have shrunk to around $61 billion from over $170 billion at the start of the year, according to figures from data aggregator Defi Llama.
In a fresh move, the US Treasury Department has sanctioned one of the industry’s biggest “mixers”, tools that collect and encrypt crypto from thousands of addresses to increase anonymity, saying it was used by hackers to launder their winnings. read more
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The US intervention this month has forced many DeFi projects to block cash from wallets linked to the Ethereum-based mixer, Tornado Cash, representing a blow to the devotees who dream of a brave new world free of central authority.
“The move has put DeFi back in its ability to be decentralized and operate in a censorship-resistant way,” said Katie Talati, director of research at digital asset manager Arca.
Indeed, the market impact could be significant, given the growing role of mixers, whose advocates argue they serve a legitimate use to create privacy and say specific users should be targeted by governments rather than an entire code.
Average usage of such services over a 30-day period hit a record high of $51.8 million in late April, roughly double the level of the previous year, according to a Chainalysis study in July, before falling with the broader crypto market.
“This makes sense given that the timing coincides with DeFi’s growing prominence in the overall cryptocurrency ecosystem,” Chainalysis researchers wrote.
Tornado Cash did not respond to a request for comment on the sanctions.
LOCKED AND ENCODED
Aave and Uniswap, two of the most popular DeFi platforms that blocked wallets linked to Tornado, have seen user funds, or total value locked (TVL), fall since the sanctions were imposed – $6.4 billion from over $6.9 billion for Aave, and $5.7 billion from $6.5 billion for Uniswap, according to Defi Llama.
This may not all be due to the Tornado, as most cryptocurrencies have suffered heavy losses in the past week and the DeFi sector has seen little change in activity – for example, Uniswap says its weekly trading volumes have remained fairly stable at around $8 billion .
“TVL has decreased, but at the same time the price of tokens has decreased,” said Max Krupyshev, CEO of payment provider CoinsPaid. “People weren’t pulling money out as much as the value of their investments was going down.”
Aave and Uniswap also did not respond to requests for comment on mixers.
BIG CATS LOOKING?
While DeFi players may face tough decisions on whether to pull back from mixers, some observers are spying a potential upside for the market if the US measures encourage traditional institutional investors to join the fray.
“Larger institutions may see the sanctions as a step toward legitimacy, potentially giving them more comfort in engaging with or investing in Ethereum and other digital assets,” analysts at digital asset manager Grayscale wrote.
In the immediate future, however, little is certain.
“Illegal” addresses identified by data firm Chainalysis accounted for 23% of funds sent to mixers in 2022, up from 12% in 2021. Regarding Tornado Cash specifically, research firm Elliptic reported that at least $1.54 billion in criminal proceeds were whitewashed through platform.
Arcas Talati believes that we have not seen the end of the degradation of mixers.
“Tornado Cash is one of the longest running,” she said. “This isn’t the last we’ll see.”
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Reporting by Lisa Pauline Mattackal in Bengaluru; Editing by Pravin Char
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