How Identify and Avoid DeFi Scams

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The decentralized financial industry is gaining a lot of interest from cryptocurrency users. Unfortunately, multiple DeFi scams and shady ventures need to be taken into account. The difference between true and false ventures will safeguard one’s portfolio.

DeFi Scams Are Very Real

Given the vast amounts of money flowing through DeFi projects these days, it is a matter of time until things go awry. Most of the projects in this space are legitimate, yet that doesn’t apply to all platforms. Since its inception, there has been a growing number of DeFi scams and other security incidents to take note of.

When such an industry achieves wider momentum, there is often a greater chance of witnessing a fraud. Everyone needs to make money fast, and running a fake project is a concrete way to do so. It’s a challenging and unforgiving business, as consumers need to stay concentrated at all times. Do your homework until you agree to make financial obligations.

Decentralized Finance Has No Recourse

Similar to most transactions involving cryptocurrencies, DeFi scams ensure users will not get their money back. Once a transaction is complete, it will remain in that state, as there is no chargeback mechanism.  Moreover, there are dozens of DeFi projects launching every week. Statistically speaking, it is only normal that some of them will turn into scams.

The permissionless nature of decentralized finance is both a blessing and a curse. Everyone can create projects and write code on a blockchain. However, technology cannot gauge whether one’s intentions are honest. As such, users need to analyze projects, review code, and make a well-informed decision. That is easier said than done.

Conducting A Basic Analysis

It does not take a degree in programming to determine whether a decentralized finance project is genuine or a future DeFi scam. By conducting the most basic of analysis, it quickly becomes apparent what the team’s intentions are.

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Is This New Project Needed?

There have been hundreds of copycat ventures throughout the cryptocurrency environment that claim to enhance current ideas. More often than not, these “newcomers” carry little new to the table and get out very easily. The same idea refers to DeFi: is the project creative, or is it simply copying the code and modifying a few names?

Any lack of creativity is also a sign of a possible scam of DeFi. A lot of work is needed to build something new in decentralized finance. The surge of creativity will finally arrive, but most of the innovations have already been tried and tested. Copying an established definition is not enough for this industry.


Who Is Running The Show?

What happens behind the scenes of decentralized finance is often a big mystery. Most projects have an anonymous team of developers, which doesn’t instill any confidence. The open-source nature of this technology allows for anyone to put code together. However, there is often a lack of accountability, especially if things go south.

Not all protocols built by anonymous developers will automatically become a scam. The lack of transparency adds an extra layer of risk for investors and speculators to take into account. Everyone is free to disclose as little or as much personal information as they want. When trying to collect people’s money, not revealing anything is automatically a red flag.

It is equally crucial to figure out how active these “teams” are. If not enough coding is happening behind the scenes, the project will likely either die or join the list of DeFi scams. While no one expects new code to be added daily, some weekly activity – particularly for new projects – is an absolute must.

Smart Contracts Audits

All too much, recent DeFi ventures are submitting the code to the public without a thorough audit. A peer analysis of the project code would not immediately preclude hacks or other mishaps from happening. It lowers the chances of anything going wrong and may add some prestige to the overall project.

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Conducting an audit is an expensive undertaking. This expense is a key reason for most new projects to fully ignore this choice. It’s best for developers to be steadfast in not touching something that isn’t audited. It’s an additional safety net of sorts, but not a “ultimate metric.”


Token Distribution And Allocation

New DeFi ventures have their own coins, which may have some potential meaning. The way these tokens are circulated also means the difference between genuine offers and DeFi scams. If the developer owns a large amount of the tokens, the market dump and the resulting fraud are likely to occur.

This applies to how the remaining tokens are allocated. If liquidity mining is an alternative, the incentives cannot be too high for consumers. Too many tokens on the exchange also cause a price drop. Other projects may elect to sell tokens via ICO or IEO, but no DeFi solution needs to raise that form of capital to be successful.


Exit Scam Potential

In theory, any decentralized finance initiative will lead to an exit scam. The vast majority of DeFi scams in 2020 are due to the original developers surviving after throwing their tokens on the market. Another result is how the team will start liquidity mining pools and then take the funds in the pool for themselves. It’s a complex landscape, but one that holds major risks.

An exit scam is likely to occur if the asset of the DeFi protocol only trades on AMM platforms. Achieving confidence from a trustworthy exchange is not easy. Evitate tokens if they exist only on AMM sites such as Uniswap and Sushiswap. Once they are listed on a standard market, there is a sense of legitimacy.

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Avoiding DeFi scams requires a great deal of work on behalf of the consumer. The sector has had its fair share of escape scams, rug pulls, and security accidents. One might also ask if it is worth putting some capital into decentralized finance at all. Buying and storing Bitcoin is also a more stable way to protect profits, but it is often often less thrilling.

Participation in DeFi includes risks that need to be carefully analysed. Looking at specific projects can allow people make smarter choices. Even though, it is likely that something is going to go wrong sooner or later.

Let’s hope that our tips mentioned above will allow you to remove the wheat from the chaff.


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