Today, I will show you how to avoid DeFi scams.
Whenever a system proves to be profitable, it is only a matter of time before it gets infested by the bad guys.
And the DeFi space is no exception. About $284M has been lost to DeFi hacks since 2019
By the time you’re done reading this post, you will know how to spot DeFi scams and avoid them.
Let’s jump right in!
Post Summary
- Brief Overview Of DeFi
- What Makes DeFi Scams Possible?
- Popular DeFi Scams
- How To Spot DeFi Scams
- Should I Still Invest In DeFi?
- Conclusion
Enjoy your read!
1. Brief Overview Of DeFi
DeFi (short for Decentralized Finance) is a term for all financial activities that have no central authority.
It relies greatly on cryptography, blockchain, and smart contract.
The purpose of DeFi is to grant its users the privacy they seek and remove the need for middlemen.
DeFi tries to create a new financial system in a permissionless and open way.
As a result, it has attracted innovations and massive adoption.
You can read our detailed review of DeFi to learn more.
I talked about what exposes DeFi to scammers in the next section.
Keep reading!
2. What Makes DeFi Scams Possible?
Different factors that make DeFi platforms susceptible to scams include:
a. Most DeFi platforms are not regulated therefore, it is easy for a scammer to do away with users’ funds.
In other words, it is almost impossible to recover lost funds on DeFi or hold malicious actors accountable.
b. These platforms are usually based on smart contracts written on blockchains.
And as we know, blockchains are permissionless. Anyone can launch scammy projects or clone existing ones.
For example, Kimchi Finance was cloned from Yuno Finance, which was cloned from SushiSwap. Interesting!
Kimchi had a good start but suffered a huge loss in the long run.
c. The financial innovations made possible by DeFi have attracted many investors (both those that understand the concept and those who do not).
This presents an opportunity for scammers to take advantage of ignorant investors.
That said, I’ll now show you some DeFi scams that happened before.
Tag along!
3. Popular DeFi Scams
a. WineSwap – created on Binance Smart chain stole about $345,000 worth of cryptocurrency from users.
b. Emerald Mine (EMD) – hosted on the EOS blockchain moved users’ tokens worth $2.5 million.
c. Compounder Finance – launched on the Ethereum blockchain stole $11 million from investors after one month of existence.
d. LV Finance – a DeFi protocol based on the Ethereum blockchain falsified the results of the audits to steal the investors’ money.
e. SharkTron – a DeFi project built on the Tron blockchain stole users’ funds worth $10 million in TRX.
f. SushiSwap – was once accused of an exit scam but the creator returned the funds.
g. $Few Tokens – scammers wanted to carry out a meme airdrop and make an undue profit but they were exposed before time.
In the next section, I explained how you can identify and stay away from DeFi scams.
Keep reading!
4. How To Spot DeFi Scams
Here are few things to check to be sure that you’re not investing in a DeFi scam:
i. The Purpose Of The Project
Find out these:
- Is it new?
- Will it improve the digital economy?
- Does it fare well with its competitors?
- Will it yield value?
If the answers to these questions are ‘No’, then the project is most likely a scam.
Any DeFi project that will scale must have a clear purpose.
ii. The Founders’ Identity
No doubt, there exist legitimate projects with anonymous founders.
However, a scammer will prefer to hide his identity so that he cannot be traced when the project folds.
So, if you can’t find any information on the people behind a project, that’s a red flag.
Another thing you want to consider is whether the founders have succeeded in running a project before.
If they haven’t, that’s a point of caution.
iii. Token Distribution
In a DeFi scam, there’s usually inflation in token price because the founders have a huge holding.
Afterward, they will dump the coin in the market, thereby collapsing the value of the coin.
How you will know is that a significant amount of the coin is allocated to the founder(s).
Another cue is an exclusive presale where only insiders receive huge amounts of the coin.
The recipients will then come on social media with so much hype for the coin. So ridiculous!
Even an ICO or airdrop can lead to sell pressure and suffocate the value of the coin.
But generally, an ICO or IEO poses a lower risk than exclusive presales.
In a case where you can’t access the information on how the token will be distributed, that’s a red flag!
iv. Development Activity
Another factor that easily gives a DeFi scam away is its development activity.
Check to see that the developer team is consistently improving on the project and not merely making promises of a better tomorrow.
If you understand coding, you can also crosscheck the smart contract code to see if there is anything amiss.
v. Smart Contract Audits
Though auditing does not make a DeFi project 100% safe, it does show the integrity of the team behind the project.
Auditing ensures that a smart contract code is secure. Since it is costly, a scammy project will not opt for one.
The absence of an audit trail reveals a higher level of risk for a project.
You will want to remember that.
vi. Possibility Of An Exit Scam
Take a good look at the liquidity pools of the project, if the founders are the major contributors of liquidity then there is the possibility of an exit scam.
It will only take a while for them to dump the coins in the market and the coin’s price will slide to zero.
Or, they will out rightly steal the funds when they’ve made ample profit. Ouch!
NB: An exit scam is when the founders of a project suddenly abandon it and do away with users/investors’ funds.
vii. Sudden Hype On Social Media
I understand that a project may need to advertise on SM to gain the attention of the public but you have to put your instincts to work here.
If you have a negative impression of the project then you should extend your research before investing.
Also, if the project’s promotions are mainly about gaining more users and not about the solution it proffers, you may want to hold on a bit.
viii. Coinmarketcap Results
Lastly, you can tell if a project may be a DeFi scam from the statistics of its token on a trusted source like Coinmarketcap
Most times, where the total liquidity, volume (24 hours), transactions (24 hours), last transaction, and or last liquidity added/removed are low or minimal, you should not be in a hurry to invest.
Wondering if you should still invest in DeFi? I talked about that in the next section.
Tag along!
5. Should I Still Invest In DeFi Coins?
DeFi coins pay huge APY and as such, you should definitely find a good one to invest in.
We can’t escape scammers, can we? So, don’t let them stop you from exploring the wide range of possibilities on DeFi.
And to be honest, if investors can exit a market early enough, they will keep their profits and not feel the harm done by the DeFi scams.
However, it will take a pro to know when to exit such projects.
As a beginner, you can go for coins that have proven to be genuine so far like COMP, YFI, LINK, UNI, and KNC, etc.
Heads up!!
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You can also join our Telegram community at https://t.me/ctmastery.
6. Conclusion
DeFi is trending and profitable but we cannot deny that scammers have landed on this space.
In order not to fall victim, do a rain check on forecast returns, team credibility, working model, promoted offerings, etc.
This is where we’ll draw the drapes in our discussion on DeFi scams; I hope you learned a thing or two.
Now tell me, have you been a victim of a DeFi scam before? Were you able to recover your funds?
Are there other DeFi scams that you know which I didn’t mention?
Let me have your responses in the comments section right now.
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