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A mixer with your crypto cocktail?

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A mixer with your crypto cocktail?

(Our weekly analysis of the wild world of cryptocurrencies)

The DeFi dream is shaken. And restless.

The big crypto project waned in 2022: Total user funds deposited in decentralized finance fell to around $61 billion, from more than $170 billion at the start of the year, according to figures from the Defi Llama data aggregator.

In a new jolt, the US Treasury has sanctioned one of the industry’s biggest “mixers”, tools that aggregate and scramble crypto from thousands of addresses to boost anonymity, saying it was used by hackers to launder their earnings.

This month’s US intervention has forced many DeFi projects to block money from wallets linked to the Ethereum-based mixer, Tornado Cash, which is a blow to devotees who dream of a brave new world without central authority.

“The motion set back DeFi in its ability to be decentralized and operate in a censorship-resistant manner,” said Katie Talati, research director at Digital Asset Manager Arca.

Indeed, the market impact could be significant, given the growing role of mixers, which proponents claim serves a legitimate use in creating privacy and argue that specific users should be targeted by authorities rather than an entire code.

Average usage of these services over a 30-day period hit an all-time high of $51.8 million at the end of April, roughly double the level of the previous year, according to a study by Chainalysis in July, before decline with the broader crypto market.

“This makes sense given that the timing coincides with the growing importance of DeFi within the overall cryptocurrency ecosystem,” the Chainalysis researchers wrote.

Tornado Cash did not respond to a request for comment on the sanctions.

LOCKED AND CODED

Aave and Uniswap, two of the most popular DeFi platforms that have blocked Tornado-linked wallets, have seen user funds, or total value locked (TVL), drop since sanctions were imposed – 6.4 billion compared to more than $6.9 billion for Aave, and $5.7 billion of $6.5 billion for Uniswap, according to Defi Llama.

This may not be entirely due to Tornado, as most cryptocurrencies have suffered heavy losses over the past week and the DeFi sector has seen little change in activity – for example, Uniswap claims that its weekly trading volumes have remained fairly stable at around $8 billion.

“TVL has gone down, but at the same time the price of tokens has gone down,” said Max Krupyshev, CEO of payments provider CoinsPaid. “People haven’t taken money out so much as the value of their investments has gone down.”

Aave and Uniswap also did not respond to requests for comment on the mixers.

FAT CATS PROWLING?

While DeFi players may face tough decisions on whether to exit mixers, some observers spy upside potential for the market should the US measures encourage traditional institutional investors to join the fray.

“Larger institutions may view the sanctions as a step towards legitimacy, potentially giving them more comfort in engaging or investing in Ethereum and other digital assets,” analysts at digital asset manager Grayscale wrote.

In the immediate future, however, few things are certain.

“Illicit” 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 proceeds of crime had been laundered through the platform.

Talati d’Arca thinks we haven’t seen the end of the crackdown on mixers.

“Tornado Cash is one of the longest around,” she said. “It’s not the last thing we’re going to see.”

(Reporting by Lisa Pauline Mattackal in Bengaluru; Editing by Pravin Char)

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