Defi Scams: How to Easily Identify Scams in Decentralized Finance
The Cryptocurrency space has been besieged with lots of innovation ever since it’s inception, many of these innovations as with Blockchain and Cryptocurrencies do not exercise any form of absolute control in the way it is used as such many people end up loosing money to dubious projects.
Decentralized Finance (DeFi) is one of the most prominent innovations in this space with lots of potentials and amazing opportunities for investors and traders, interestingly a lot of cryptocurrency projects are springing up daily using the DeFi protocol.
It is interesting to note that while blockchain technology possess amazing features like the permissionless attribute, this also exposes investors and traders to risks as just anyone can launch dubious projects in the DeFi space, whether the person intend to remain in the long term remains to be seen and of course the job of you the investor is to do your own research in order to mitigate against such risks.
How to Identify Scams in DeFi.
For us, it’s a routine to always ask pertinent questions about any project of interest we wish to invest or trade in, the moment you begin to ask certain questions about the viability of a project, it’s very possible to begin to see red flags why you should not invest in such a project, at the same time, asking the right questions with proven and verifiable responses can as well lead you to gold mine of a genuine project likely to give you astonishing returns in the long run.
Purpose of a project:
We already have plenty of projects in the DeFi space such that it’s hard to see a new one offering something different or unique in the market, but then again, one can begin to ask questions like what will this project do differently than it’s competitors? What’s the advantage of this project over existing projects? These and many more questions alike will trigger your curiosity to further look before you leap.
If you are familiar with coding then this presents an opportunity for you to check the codes by yourself, the purpose is to ensure that there are no malicious contents in the code, further more, if the developers are constantly updating the lines of code then it could be a sign they are in for long term but if you see bugs or secret back door in the code then its a huge red flag for a potential DeFi scam.
Auditing the smart Contracts of DeFi projects gives it an edge in this space. Though smart Contract Audits can be expensive but legitimate projects obviously pay for it given their genuine nature as this encourages trust among it’s community members . It’s simply a sign that the project is not likely a DeFi Scam.
While it is true that the Cryptocurrency space allows for anonymity, it’s pertinent to note that teams with anonymous members is a huge red flag for DeFi scam and it’s worth double checking before one invests in such projects, though it is possible for anonymous projects to be legitimate, also note it’s even more difficult to hold them accountable for dubious behavior, therefore it’s only wise to invest in projects with verifiable teams with known social media presence.
This is a very important aspect of Defi, most dubious projects allocate huge volumes of their tokens to themselves. Whenever you see such, just know it’s a huge red flag as the owners can easily dump the entire thing in the market and disappear, When you have over 40% to 60% of circulating supply domiciled in an address or group of addresses then it’s a potential scam.
Doing the above checks does not completely rule out the possibility of scams but it does to a great extent reduce the chances of scam, the aim is simply to enlighten us on how to identify dubious projects and stay safe while using the DeFi protocol either through Yield Farming or trading tokens listed on automated market makers. The goal is simple, be vigilant.
Defy the scammers, while on DeFi.