Decentralized Finance is one of the fastest-growing ecosystems within the blockchain industry. It is a revolutionary concept that aims to solve the inefficiencies in traditional finance. The total value locked in DeFi is over $78 billion. According to CoinDesk, DeFi is already a $100 billion industry. Going forward, the industry is only going to increase with leading traditional financial institutions turning to blockchain for solving inefficiencies. The increasing utility of DeFi projects is attracting more and more new investors to the industry. As the popularity of DeFi grows, the probability of DeFi scams also grows.
Scammers love the crypto industry due to its anonymous nature and largely irregulated space. For DeFi in particular, an open financial system, lack of KYC requirements, and the absence of a centralized structure make it easier for scammers to scam investors.
Most Common Types Of Scam In DeFi
- Rug Pull: DeFi projects dominate the altcoin market along with NFTs and a few other popular trends. Hype plays a key role in driving the demand for these projects. Scammers often use hype as a tool to lure people into investing their money in random projects. The projects are often promoted on various social media platforms where scammers sell the hope of exponential gains. And once the price of the token pumps due to increasing investment, the scammers sell all their holdings, leaving other investors in jeopardy. The famous crash of the Squid Game project is a popular example of rug pull.
- Wallet Dusting: Wallet Dusting or Dusting is a common practice used by hackers and DeFi scammers to get hold of decentralized wallets like Metamask and TrustWallet with high transaction volumes. In Wallet Dusting, a minuscule amount of crypto known as dust is sent to multiple accounts. Once the wallet owner uses the dust amount, scammer/hackers get the opportunity to trace the original wallet address. Later, they try to take over the wallet through fishing or any other penetration technique. Wallet Dusting is a very common DeFi scam.
- The Honeypot: Unrealistic price predictions and hype are used to ignite hope in investors’ minds. Since hype is a natural driver for increased investment in altcoins, creating a honeypot is one of the easiest ways to organize a DeFi scam. You invest in a token, and the price skyrockets as predicted. But when you try to sell in profit, you are unable to do so. Here’s the trick: the scammer inserts a line of code in the protocol, restricting the permission to sell to only their wallet. Investors can only see the price decrease again with their money locked in, as the scammer cashes out in profit.
Tips To Avoid A DeFi Scam
The crypto industry has its own share of scams and fraud events, and DeFi scams are a part of these scams. While the crypto industry offers high security and faster transactions, one must steer clear of fraudsters and scammers trying to dupe investors on the pretext of unrealistic gains. Here are some tips to avoid/prevents DeFi scams:
- Do Your Own Research: This is a must for any kind of investment. Scammers feed on hypes and fake news. An uninformed and uneducated investor is an easy target for scammers. The only way to reduce this risk is to educate yourself about a project, its use cases, and its growth potential. Investment in any project must precede thorough research. Make sure you invest in trusted projects with real-world use cases. Give preference to utility over hype when making investment-related decisions.
- Stop Chasing Exponential APY: It is easy to lure beginners to invest in a project by selling them the hope of exponential APY. Crypto investment can provide unrealistic gains, but every day is different, and so is every project. Since you are putting your hard-earned money into a project, you must investigate the team, the community, and the partnerships to avoid a DeFi scam.
- Third-Party Review: Companies in the crypto industry take security seriously, and they often partner with third-party agencies for review or audit to differentiate themselves from scam projects. While analyzing a project for investment, check whether it has review certificates from top agencies like RugDock, CertiK, etc. It is wise to steer clear of an unverified project or one whose audit is pending.
- Check Whether The Project Follows KYC: While the crypto industry is known for its inherent anonymity, projects are obliged to follow to ‘know your customer’ (KYC) rule. KYC is a proven mechanism to fight money laundering, financial fraud, and financial terrorism. Hence, you can trust a project asking for KYC details from its users. Since the project has information for all its users, the chances of fraud are comparatively less. Moreover, trading on exchanges that ask for KYC details is another great way to avoid DeFi scams. Make sure you invest in projects on reputed exchanges like Binance, KuCoin, FTX, etc.
- Check If The Project Is Listed On Certified Platforms: Another key way to avoid DeFi scams is the check if the project is listed on certified platforms like CoinMarketCap, Poocoin, Dexguru, and Coin Gecko. Poocoin is a popular Defi trading analysis platform that seasoned investors use for market analysis. Listing on popular platforms like CMC and Poocoin signals the authenticity of a project. Investing in authentic projects with a high market cap could be another way to keep your funds safe against scams.
Conclusion
Hype plays a key role in the promotion of any DeFi project. It is a little tricky to separate authentic projects from scam projects as authentic projects also use hype. Therefore, it is extremely important for investors to educate themselves about the industry and chase utility instead of unrealistic gains to protect their funds against DeFi scams. The security in the crypto industry is only going to increase with the increasing participation of financial institutions and governments. But as an investor, you must rely on your research skills and analyses for any investment in the crypto market.