A major crypto project weakened in 2022: total user funds deposited in decentralized finance fell from over $170 billion at the start of the year to around $61 billion, according to data aggregator Challenge Llama.
In a new shake-up, the US Treasury Department has sanctioned one of the industry’s biggest “mixers”, tools that aggregate and scrape cryptocurrencies from thousands of addresses to increase anonymity, claiming hackers are using it to launder their earnings.
This month’s US intervention forced many DeFi projects to block money from wallets linked to Ethereum-based mixer Tornado Cash, a blow to followers who dream of a new world without a central authority. .
“That proposal set back DeFi in its ability to be decentralized and operate in a censorship-resistant manner,” said Katie Talati, director of digital asset management research at Arca.
Indeed, the impact on the market could be significant, given the growing role of mixers, which proponents argue serve a legitimate benefit by creating privacy and argue that authorities should target specific users rather than entire code.
Average usage of these services over a 30-day period hit a record $51.8 million at the end of April, roughly double the previous year, according to a study by Chainalysis in July, before falling with the broader crypto market.
“This makes sense given that the timing coincides with the growing prominence of DeFi in the overall cryptocurrency ecosystem,” Chainalysis researchers wrote.
Tornado Cash did not respond to a request for comment on the sanctions.
LOCKING AND CODE
Aave and Uniswap, two of the most popular DeFi platforms that blocked wallets linked to Tornado, have seen their user funds, or total block value (TVL), drop since the sanctions were imposed – $6.4 billion compared to more than $6.9 billion for Aave, and 5.7 billion versus 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 claims its weekly trading volume has remained fairly stable at around $8 billion.
“TVL fell, but at the same time the price of the token fell,” said Max Krupyshev, CEO of payment provider CoinsPaid. “People weren’t taking money so much that the value of their investments went down.”
Aave and Uniswap also did not respond to requests for comment about the mixers.
Chart: Mixing Problems –
BIG CATS RDENT?
While DeFi players could face tough decisions on whether to leave the mixers, some observers see potential upside for the market if the US measures encourage traditional institutional investors to join the fray.
“Larger institutions could see the sanctions as a step towards legitimacy, which could give them more comfort in engaging or investing in Ethereum and other digital assets,” analysts at the asset manager wrote. Grayscale digital.
In the near 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. Looking specifically at Tornado Cash, analytics firm Elliptic reported that at least $1.54 billion in revenue was acquired they were laundered by crime through the platform.
Talati d’Arca thinks we haven’t seen the end of mixer smashing.
“Tornado Cash is one of the longest,” she said. “It’s not the last thing we’ll see.”
