6 Ways to Avert being Scammed in Cryptocurrency DeFi Markets in 2021
What is DeFi?
DeFi is short form for Decentralized Finance, which is a blockchain-based form of finance that does not rely on central financial intermediaries such as banks, brokerages, exchanges to offer traditional financial instruments, but rather makes use of smart contracts on blockchains, the two most common being Ethereum and Binance Smart Contracts.No doubt, cryptocurrency is revolutionalizing, one Fintech after another is being deployed into financial world.DeFi industry is progressively gaining very popular, and as such, scams associated with DeFi, and by extension cryptocurrency is becoming more and more rampant and huge. It's true that it's easy to make money from cryptocurrency trading, the same is also true about the ease with which people lose their hard earned money in Defi cryptocurrency scams. I present here 6 smart ways you can avoid losing money in Defi scams.
Doubtless, the DeFi industry is gaining traction. Ever since the summer of 2020, referred to some as ‘DeFi summer,’ the total monetary value locked in various protocols is appreciating, while the volume on decentralized exchanges and automated market makers is also geometrically rising.
This has also considerably increased the number of scams in the DeFi space proportionately.
Already, this year, 2021 has already recorded a number of scams in Cryptocurrency space, ranging from exploits, hacks, and rug pulls.
The diagramatic display below speaks for itself. It shows that even some of the most reliable protocols are subjected to potential exploits. However, as Vitalik Buterin put it during the 2019 Ethereal Summit of 2019, there’s a non-zero chance of failure when it comes to DeFi protocols.
Agreed that there are inherent risks associated with every protocol, there are blatant scams, exploits, and rug pulls, which I think can be averted en masse if one can apply due diligence.
Having established the background, let's look at a few things you should consider before investing in any cryptocurrency (DeFi-based project), irrespective of whether it’s on Binance, or Ethereum Smart Chain, or any other blockchain out there.
Here are the Most Common Scams to Look Out For
Before we delve into how to know whether a project is scammy, let’s discuss the most common types of scams that you should look out for.Hacks and Exploits
Agreably,these are kinds of scams you should be aware of. The DeFi programme provides huge playground for avid hackers who’re looking for any weak point in various protocols to exploit and take off with as much money as they can.There has been plenty of this scams of late, one of the most recent being that of the decentralized exchange DODO.
It was reported that several V2 crowd pools belonging to the exchange were exploited, and the hackers stole a whooping sum of $3.8 million.
Exit Scams
Exit scams are also another type of scams to take note of. This occurs when the team anchoring a certain project disappears, taking the money of the investors with them, and leaving no trace of themselves.These scams usually occur during the early stage of the projects. For instance, a programme might be promoting a private sale where the unassuming investors get a great deal before their token hits the public market. In some cases, the project does not even reach that stage because the team pulls an “exit scam” and run with the money they’ve collected from the early investors.
Rug Pulls
Rug pulls also agreably classified as exit scams, but with a little difference in that the team doesn’t get away with the money clients invest in a presale stage but rather list the token on a decentralized exchange (DEX), such as PancakeSwap, Uniswap, SushiSwap, etc. and then awaits enough people to join, providing liquidity to the pool.Once they’ve succeeded in getting enough people in, and of course their funds also, the team would “pull” the liquidity out of the DEX, collecting everyone’s MONEY in it.
Huge number of rug pulls took place on Uniswap last year, and this year too, and now recently in PancakeSwap, the largest DEX on Binance Smart Chain, has also become a blosoming field for scammers of this kind. One of such scams happened in a programme called TurtleDex, and the scammers made off with $2.5 million in BNB.
Huge number of rug pulls took place on Uniswap last year, and this year too, and now recently in PancakeSwap, the largest DEX on Binance Smart Chain, has also become a blosoming field for scammers of this kind. One of such scams happened in a programme called TurtleDex, and the scammers made off with $2.5 million in BNB.
6 Ways to Avert being Scammed in Cryptocurrency DeFi Markets in 2021
Having identified the most popular types of DeFi scams let’s discuss how to avoid being exploited by the wolves running these projects.Please, keep in mind that, as already stated, irrespective of how perfect your research might be, DeFi protocols carry an inherent non-zero chance of failure. Hence, even despite doing a thorough research work, the project might still be endangered. Expectedly, you owe it to your investment to reduce this risk to the barest minimum.
1. Research the Team
Before you jump into any seemingly good-looking project, one of the first things you should look out for is who’s behind it. Of course, there are quite a lot of nuances surrounding this.First, check to see if the project has an “about us” page whether the core project team members are unreliable or have provided fake LinkedIn profiles created just recently with no connections or previous history, this portends a major red flag. Always try as much as you can to find out about the individuals behind the project – what kind of work they’ve been doing before that? Are their identities verifiable? What preveious projects have they been into? There are all sorts of answers you should get before jumping in and staking your money.
Of recent, there’s a growing worrisome trend in the DeFi space where developers remain anonymous. There is serious debate in the cryptocurrency space as to whether this is good or not. Regardless if the team is anonymous or not, there are still due dilligence you can carry out before investing in any cryptocurrenc projects.
For instance, one of such due dilligence is for you to join their community channels on Telegram and start asking questions. If the team start answering with commonly dubious answers such as “this information will be made available after the token sale,” or they start acting aggressively, do yourself a favor and call it a quit at that point. Sure, you might have FOMO (fear of missing out) on potential gains, but 9 out of 10 times, you’ll be taking an unnecessary risk that’s just not worth your time nor your investment.
Any project that fails to disclose its list of early investors and does not also provide good information about its advisors – portrays a red flag. This, coupled with a completely anonymous team, should definitely serve as a warning to keep off.
2. Advisors and Known Funds – Less Risk
Also consider the list of advisors and investors in the early rounds. Programmes with well-known and trusted advisors are generally a lot more reliable, and the same goes for their investors.Any project that fails to disclose its list of early investors and does not also provide good information about its advisors – portrays a red flag. This, coupled with a completely anonymous team, should definitely serve as a warning to keep off.
Yes, we know very much that every DeFi protocol might get hacked. However, if it's being founded by reliable investors and a proper, well-known team, the chances of refunding its users or undertaking other initiatives to compensate their losses are substantially higher.
You should also take a look at the overall materials that the team has provided so far. If you only see a basic website coded in WordPress in a few hours with a 1-page whitepaper and no clear roadmap, walk away.
Anyone asking for a serious investment should go through the trouble of preparing professional deck materials, clearly explaining the benefits of the product, the challenges of the market, and how they plan to tackle them.
3. Research the Product
Investing in DeFi projects should be justified by the same merits as in any other investment. You need to look into the product and determine whether you see a path where this product actually works.You should also take a look at the overall materials that the team has provided so far. If you only see a basic website coded in WordPress in a few hours with a 1-page whitepaper and no clear roadmap, walk away.
Anyone asking for a serious investment should go through the trouble of preparing professional deck materials, clearly explaining the benefits of the product, the challenges of the market, and how they plan to tackle them.
4 .Is the Smart Contract Public?
Every DeFi-based project has a smart contract. Try to take a look if the team has made their smart contract public or not. This allows you or tech gurus to verify its authenticity, as well as to explore potential loopholes and attack vectors.Now, one might argue that a team won’t make their smart contract public out of forking considerations where someone else might steal it and monetize it faster.
Not withstanding, the general rule of thumb should be for you to invest only in projects with private smart contracts, so long as the team behind them is fully verifiable, trusted, and reliable with a proven track record. If you see that the team is completely anonymous, their product is dubious, and their smart contract is not public, you'd better walk away.
If you’re a tech-savvy person with a sound understanding of programming languages used to code smart contracts and are fully capable of examining them on your own and you’ve done your homework – this shouldn’t be a concern.
5. Look for a Smart Contract Audit
This step is vey very important. DO NOT EVER invest in projects that haven’t had their smart contracts audited yet. This, again, has nuances to it.If you’re a tech-savvy person with a sound understanding of programming languages used to code smart contracts and are fully capable of examining them on your own and you’ve done your homework – this shouldn’t be a concern.
However, if you’re an average educated man, with little or no programming knowledge, just like most of us when it comes to complex coding, you have to trust the work of experts with proven track records in the industry – a.k.a, auditors, and auditing companies.
If a reliable auditing company has determined that the code is free of loopholes, you can justify an investment in it. Otherwise – steer clear. The risk is not worth it.
If it is that the team behind it will hold a huge portions of the tokens in circulation, this should give off a red flag.
If a reliable auditing company has determined that the code is free of loopholes, you can justify an investment in it. Otherwise – steer clear. The risk is not worth it.
6. Token Distribution & Initial Market Cap
Find out how the tokens are distributed before investing in any new DeFi project.If it is that the team behind it will hold a huge portions of the tokens in circulation, this should give off a red flag.
Needless to say, if the token distribution chart is not made public – you should consider not joining such project at altogether.
Also, check out the vesting periods. If there are none and all tokens are unlocked during the token generation event, you should probably consider the possibility of an exit scam since nothing is stopping the team from dumping their coins on the market.
Also, check out the vesting periods. If there are none and all tokens are unlocked during the token generation event, you should probably consider the possibility of an exit scam since nothing is stopping the team from dumping their coins on the market.
This is why reputable projects have different vesting schedules where the team, as well as seed and private sale investors, have their tokens unlocked periodically and not all at once.
Pick up this nugget about market capitalization – projects with smaller initial market value have greater chances of providing higher returns. Of course, the bigger the market cap is the smaller its potential for disproportional returns. In 2021, a project with a starting market capitalization below $50 million could be considered reasonable.
Pick up this nugget about market capitalization – projects with smaller initial market value have greater chances of providing higher returns. Of course, the bigger the market cap is the smaller its potential for disproportional returns. In 2021, a project with a starting market capitalization below $50 million could be considered reasonable.
Closing Thoughts
The above are due dilligence, you should look out for when investing in any nascent DeFi-based programmes. It's important you remember that the above six points should be checked out in conjunction.
It is only after you have done all the research and investigations and have determined that the project is safe or at least has minimal risks for scams that you can justify committing your hard-earned money into the said project. However, if one or more of the above is found wanting, you should proceed with caution.
It is only after you have done all the research and investigations and have determined that the project is safe or at least has minimal risks for scams that you can justify committing your hard-earned money into the said project. However, if one or more of the above is found wanting, you should proceed with caution.
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