The number of scams and exploits in the DeFi and web3 world can be quite staggering, with only a few reaching high enough numbers that they get mainstream media attention. One of the trackers of scams is the security audit service Certik, which in their latest monthly Skynet alert, reported that the total amount of loss from January to August of 2022 was a staggering $2,338,910,183. 

To verify this amount, I took a look at one of my favourite websites which follows the cryptocurrency field: Web3isgoinggreat. A feature of their news feed is a counter which keeps track of how much has been lost to various types of fraud. Scrolling back to January 1st of this year, the counter adds up to 2.667 billion USD. 

While it is possible to laugh at these amounts, the sad truth is that much of this is lost by amateur investors trying to invest in the “hottest new thing”. Just take a look at the adult population in the USA who, according to an Ascent survey, about 56% own cryptocurrency or have in the past. In addition, it is a fair assumption that 2-3 billion is just a lower bound of the total amount lost, as it doesn’t completely cover losses in non-English speaking countries, and surely there are lots of smaller scams that don’t get any attention at all.

Billions of dollars lost to scams and fraud are of course a tragedy, impacting thousands or millions of people. But, for people with a slightly different mindset, it sounds like an exciting business opportunity. So, how do you create your own cryptocurrency, and how do you market it? 

Luckily the starting cost of setting up your own cryptocurrency might only be a few dollars. How to do this is a common topic on /r/CryptoCurrency, where people often become on-paper millionaires or even billionaires. The basic method is to establish a wallet, which is basically a piece of software that stores different types of cryptocurrencies. You then link this wallet to a new token established on a website that lets you create new tokens running on an existing blockchain (such as Etherum). After you add some liquidity to it by buying a few of the coins from yourself, since the paper value of the coin can be quite high.

Of course, creating a cryptocurrency in this way doesn’t make it easy to trade in. To do that, you should get it listed on some of the larger exchanges (such as Binance, which has almost 1600 coins listed as of today), as they require that the cryptocurrency is more established. Criminals aiming for this would need to do at least the following:

1. Create a website, a Twitter feed, a nice logo, and a good pitch for how important your coin is. If you can’t think of anything just use one of the GPT-3 text generators available online (here is a GPT-2 based one that doesn’t require a sign-up).
   
   
2. Make it look like there are some real developers behind the project; perhaps use something like Stable Diffusion to render some convincing and unique photos.
   
   
3. Buy some old accounts on bitcointalk and other forums where new cryptocurrencies are discussed. There is a thriving underground market in these accounts!
   
   
4. Do a lot of wash trading using your new coin. In other words, do trades between wallets owned by yourself so that it looks like there is a lot of activity. There are estimates that 95% of all bitcoin transactions are wash trades.

Then, once there is some real interest in your coin, you simply sell the majority of your holdings doing what is called a rug pull. Looking at the Certik report above, the average “income” from this type of scam is about 300,000 USD.

The biggest news of the last few months is that Ethereum is switching from “Proof of Work” to “Proof of Stake”. This basically means validators on the blockchain are switching from calculations done by graphics processors and custom hardware (aka big energy investments) to requiring proof of having capital on the Ethereum blockchain itself. If the validator is dishonest the capital can be destroyed. 

Before this switch, Ethereum was using about 93 terawatt hours of electricity annually. (For comparison, the entire world is using about 24000 terawatt hours annually.) After the merge, Ethereum will use less than 1 terawatt hour annually. So the changes reduce the world's electricity bill by 93/24000, or 0.4% (sustainable Ethereum anyone?!).

A less reported benefit of the merge is that the protocol updates will lead to much higher transactions/second numbers. While the previous record was 20 transactions per second, the new protocol might eventually reach 100,000 transactions/second. To me, using 93 terawatt hours of electricity, about the yearly usage of the Netherlands, and only reaching 20 transactions/second is quite surprising, but at least it will have some impact on the energy prices here in Europe this winter.

To fight fraud and manage the environmental impact of DeFi, the EU is proposing to amend the regulation of crypto-assets. This proposal covers issuers of unbacked crypto-assets (such as the one I described above) including so-called “stablecoins”, as well as the trading exchanges and the wallets where crypto-assets are held. The goal is to protect the investors and foster innovation. 

After reading the proposed regulation, it is clear that it is a quite radical re-invention of the cryptocurrency world. For instance, new coins would only be allowed through registered EMIs (electronic money institutions) and the European Central Bank would have the final say in whether the token could be issued or not. This is quite different from the current situation, where a sufficiently motivated teenager can anonymously establish their own cryptocurrency in a single evening.

To me, the biggest question is if it is even possible to treat cryptocurrencies similar to securities offered by regulated entities. The cryptocurrency exchanges we have today are so unregulated, and the products are so complicated, that trying to regulate the market the same way the financial markets are regulated seems very optimistic. Perhaps it might be better to treat it as internet gambling, which is already quite regulated in many countries.

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