How to Spot Scam in DeFi?
DeFiSecurity
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How to Spot Scam in DeFi?

Beginner

Explosive growth combined with a lack of legal oversight has attracted an influx of scammers to DeFi in recent years. Here we will give you some tips on identifying fraudulent projects in DeFi that will hopefully help protect your funds from being stolen by malicious actors.

What is DeFi?

DeFi (Decentralized Finance) is a type of blockchain-based financial infrastructure. It aims to eliminate centralized intermediaries from financial transactions and enable transparent and auditable transfer of value in the global community.

An innovative and fast-developing solution, DeFi has gained widespread recognition in recent years. But like any other popular niche, it has also attracted a lot of attention from scammers looking to cash in on the hype.

How to Recognize DeFi Scams

While it is impossible to completely prevent DeFi fraud, it is important for crypto enthusiasts to be able to recognize some of the known "red flags" associated with DeFi projects. What should you be on the lookout for?

What is the purpose of the DeFi project?

A DeFi project without a specific goal is unlikely to do well. There are currently numerous platforms that piggyback on the attention given to DeFi without trying to create anything new or innovative. Since the value of a currency is usually determined by its utility, a project without a clear use case may end up issuing worthless tokens. 

When was the last development activity on the DeFi project?

DeFi is an open-source movement. With all DeFi protocols and applications being available for anyone to inspect and audit, internet users have the opportunity to evaluate the project’s prospects by looking at its development activity. A project whose developers are constantly delivering new code, polishing and upgrading new and existing features is most likely the real deal.

Are the smart contracts audited?

A smart contract audit is a comprehensive methodical review of a smart contract’s code. It is usually conducted to identify any bugs or security vulnerabilities that could pose a threat to a project's users. While a smart contract audit cannot guarantee a project’s legitimacy, it confirms its smart contract security if performed by a trusted auditing firm. 

Most Common DeFi Scams:

Rug pulls

A so-called “rug pull” is a cryptocurrency scam in which a developer abandons a project after raising funds from investors. Rug pull scammers usually create a token, list it on a decentralized exchange (DEX), pair it with a high-cap cryptocurrency, collect funds from investors and then drain liquidity from the token’s liquidity pool.

To avoid falling for a rug pull DeFi users are recommended to conduct thorough research before investing in a new cryptocurrency project. Some of the potential rug pull warning signs may include an unrealistic roadmap, low liquidity, an anonymous team and a low-quality website.

Phishing scams

Phishing is a type of cybercrime in which fraudsters impersonate legitimate organizations in an attempt to steal their victim’s personal data. Crypto phishing scams typically use emails or text messages to lure investors to fraudulent sites where they are asked for passwords or private keys.

We strongly advise DeFi users not to open any links or attachments in email or text messages from unknown sources to avoid becoming victims of phishing scams.

Scam airdrops

An airdrop in the cryptocurrency industry is the unsolicited transfer of a token or a coin to a large number of wallet addresses. Airdrops are usually associated with the launch of a new cryptocurrency and serve as part of a project’s promotional campaign.

In airdrop scams, criminals commonly send fictitious tokens to an investor's wallet in an attempt to induce their victim to visit a phishing website. Since it is not always easy to distinguish a fraudulent airdrop from a legitimate one, it is important that DeFi users conduct thorough research into any cryptocurrency airdropped to their wallet before interacting with it. 

Pump and dump

Pump and dump is a type of cryptocurrency fraud that involves a holder boosting the price of a digital asset through misleading promotion and then selling it at an inflated price. As soon as scammers "dump" their shares of a falsely advertised token or coin, its price plummets, causing investors to lose money.

To avoid falling for a pump and dump scam Defi users are encouraged to carefully assess the feasibility of the promises of any DeFi project they are considering investing in. If something seems too good to be true, it probably is.

FAQ

Can you get scammed in crypto?

Yes. Unfortunately cryptocurrency scams are very common. To protect themselves from becoming victims of crypto scammers, DeFi users are advised to conduct a thorough investigation before investing in a cryptocurrency project.

What are some of the most popular crypto scams?

Here are some of the common cryptocurrency scams DeFi users should watch out for:

  • Rug pull scams
  • Phishing scams
  • Fraudulent airdrops
  • Pump and dump

How do I protect myself from DeFi scams?

 Here are some steps investors can take to protect themselves from DeFi scams:

  • Do not share your private keys
  • Do not invest in projects that lack background information
  • Only download apps from official platforms
  • Do not open any links or attachments in emails or SMS messages from unknown sources
  • Double check URLs for the websites related to crypto
  • Use multi-factor authentication in your crypto wallet

What are some of the warning signs of a rug pull?

Rug pull warning signs may include an unrealistic roadmap, low liquidity, an anonymous team and a low-quality website.