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

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.