The emergent popularity of the DeFi industry has increased its vulnerability levels and risk. However, there are ways to secure your money and avoid losses.
After its success and popularity in cryptocurrencies, decentralization has been getting popular in every field of life, especially in financial systems. It gave birth to DeFi (Decentralized Finance), which is warmly welcomed and blooms quickly. Financial transactions are performed through decentralized exchanges, and DeFi systems are increasing their liquidity and gaining users’ trust. Funds volume on distributed exchanges and numerous online protocols indicate the increased use and popularity of DeFi systems.
Another parallel factor that observed a dramatic increase is the DeFi scams that include multiple types such as exploits, hacking, and rug pulls.
Various infographics are available to explain it, and one can search on the internet. According to infographics, many trusted protocols are subjected to prospective abuses, and DeFi protocols are pretty easy targets for such exploiters.
Online transactions require protocols, a set of rules, to execute them. However, different risks are associated with other protocols. Numerous exploits, rug pulls, and scams increase the threat to DeFi system users. The excellent aspect is that there are ways to help secure your data, money, and transactions, but it requires diligence.
You must consider some points whenever you want to invest in any DeFi system or project. To avoid any threat, you must know the nature and strength of the potential hazards. Every platform, whether based on any blockchain like Binance Smart Chain, Ethereum, or any similar one, involves risks, and the users can avoid them by taking necessary safety measures.
Here is a brief description of mons known scams related to DeFi systems.
The Most Common Scams to Avoid
Knowledge is power, and we’ll apply this here. Before proceeding to the identification of a scam project and ways to be secure, it looks pretty good to know the different types of scams that we can encounter. We can see several cases in our surroundings that started with enthusiasm and ended with grief and sorrow. Many people have invested without any information and market analysis and facing financial disasters, and all such decisions end up in tragedies.
Instead of crying over the spilled milk, we should take care in advance and try to reduce the chances of loss. The one willing to invest DeFi projects must have information about the scamming activities and indicators. There could be many scam types, but here we consider them regarding their intensity. Consider the following; these are a few of the most common types.
- Exodus Scams
You may have heard about the situation when an investment team flies away after collecting a handsome investment. It also happens in crypto, and DeFi systems and users are in need to be aware of such scams.
This type of scam frequently happens in prior investment steps. The teams start getting investment before the launch of the project and then disappear from the scene instead of launching the project.
For instance, a project starts the private sale of a token instead of joining any IPO. It bounds the investors to invest in bulk with a temptation that all their investment will return with handsome profit when the token hits the market.
Most of the time, such projects never touch the barrier and vanish before entering the market. It happens due to the fraudulent nature of teams and their run away with the money of initial depositors, leaving no sign behind.
Such scammers enter the market every time with a new face and commit theft on innocent investors. So, before choosing a project for investment, the investors must be highly vigilant and greed free.
- Hacks & Abuses
Hacking is widespread regarding online systems, and DeFi systems are at the top of victims. Tiny loopholes in procedures and protocols invite enthusiastic hackers who use them intelligently to take control and extract money.
There are many examples of hacking and abuse of the DeFi systems, and hacking of decentralized DODO exchange is one of the famous examples. The CryptoPotato has also reported many issues related to crowd pools linked with exchanges being abused and hackers taking away $3.8 million in this event.
Exploits are also practiced by using the system vulnerabilities because these provide an opportunity to misuse protocols and their permissions.
- Rug Pulls
It is also a type of exit scam with a little different approach. In this fraudulent activity, the firms launch their tokens on any decentralized exchange and tempt the people to join this pool. They hold their fire until they get a handsome amount from investors. At this point, they squeeze out their liquidity, which has the most part of the investors’ money.
Uniswap-like decentralized exchanges are used to launch such tokens; in previous times, this exchange has been the victim of numerous such rug pulls, and now another DEX has joined the suspected squad, i.e., PancakeSwap, and it is based on Binance Smart Chain. Such kind of DEX proves them as a play area for the scammers, and if we observe the reports, the latest project named TurtleDex causes a pull away of $2.5 million.
There could be many ways of implementing this kind of fraudulent approach. The more scams are there, the greater the need for being vigilant, active, and more logical before investing in any DeFi project.
Practical Solutions for Secure Investment Avoiding DeFi Scams
Once you identify the threats, their strength and potential, you can avoid them in a better manner. The same is the situation with heists related to DeFi protocols, when these are identified can be managed and avoid in an excellent manner.
As it is discussed earlier that DeFi protocols are inherently have a non-zero chance of failure regardless of your research perfection. So, be careful because your perfect research and homework doesn’t affect the project danger; it still can be highly risky. However, you can manage your investment to minimize the risk.
Team Exploration
You earn your money with hard work and face many hurdles, so it deserves your vigilance and attention before throwing it into any project. You may see lots of tasks as strong candidates for your investment because of their high turnovers. It’ll be pretty wise to explore the team behind a project. It involves many nuances, but you shouldn’t ignore them.
Initially, look for their online presence, especially the “About Us” page that displays their vision, mission, and the entire team. Check for the team details and their profiles. If you find any fake profiles generated a few days ago and haven’t any connections or a few connections, this is the first red flag you should notice.
Try to know as many things about the team behind the project as you can find. There are numerous questions whose answers are necessary to make an image and make a decision. A few of them are: what have they been doing in the past? Identity of team members is verified or not? Are there more relevant projects on their credit? What were the performance and results of previous projects?
In most online systems, the developers remain anonymous, and with the DeFi system, you can encounter this situation. But it doesn’t mean that you can get information about them. There are many parallel ways to know and judge the team behind the project.
One of the most helpful methods is to join the community channels like Telegram and interact with users and the team. If your questions are answered ambiguously or diplomatically, or they become angry with your questions. Don’t ignore this red flag and keep yourself safe by not investing. You might think that it’ll deprive you of potential gain, but there are strong chances, can say up to 90% chances of high risk and fraud. So, remain vigilant and go on for a safe investment.
Identify advisors and funds to reduce risk
In the next step, look for the early advisors and the primary investors. If you find a renowned advisor, it adds to the reliability and credibility of the project. If you can’t find the advisors, try to find the investors. The presence of renowned people on the investor’s list encourages the investment because it enhances the reliability of the project.
If the scenario goes opposite and the project doesn’t share the advisors’ or investors’ list and also refuses to provide relevant information, there is an indication of threat. If all this is summed up with an anonymous team, it is definitely alarming. Do not proceed and focus on saving your money along with your time and effort.
Here is a fundamental question, what is the importance of well-known advisors and investors? It is simple; every DeFi protocol has an associated risk of hacking. The presence of reliable and renowned investors and a team of skilled developers and advisors increases the chance of recovery and refund of your investment or at least compensation for your loss.
Product Investigation
A wise investment always considers maximum information of product and future expectations. Because these play a key role in profit generation, similarly, DeFi protocols must be explored and investigated as much as it is possible.
If you are planning to invest in the DeFi industry, you must explore it with all its present features and future potential. The reliable projects have detailed presentations through a system or website having detailed features, facts, and figures. If you met only a WordPress website having no details and a single-page whitepaper, it’s a huge red flag. Ignore it and move away to find some reliable platform.
For a serious and profitable investment, be prepared to analyze the potential DeFi protocols and find the most suitable one for you. Trustworthy projects must have professional presentations, explain everything clearly, and discuss the progress path of the product and also the future potential of the product. They must be aware of market challenges and have an effective plan to handle them.
Status of Smart Contract
Decentralized Financial systems are developed on the blockchain using smart contracts. Reliable projects publicize their smart contracts to win the users’ trust. When you decide to join a DeFi protocol by investing in it, you must see the smart contract. It enables to confirm the project’s authenticity and also reveals the prospective loopholes and attack threats.
However, keeping the entire smart contract public is not mandatory as it involves the threat of stealing and monetization of the smart contract illegally. So, here is a solution for it, you can trustfully invest in a project with the private smart contract when you know the powerful team behind it is certified. Their previous record can help you in this assessment.
Now it is crystal clear that if a project has an anonymous team, an uncertain product, and a private smart contract, it is not suitable for investment. It’s better to leave it and walk away.
Check for Audit of Smart Contract
You would be surprised at what is smart contract audit? It is checking code by experts to find any loopholes that can be a source of future threats or exploitations. So, whenever you decide to invest in any DeFi protocol, check for their smart contract audits. If they never had any audit, joining it will not be safe because your money is worth more.
The tech-related or programming-related persons can do this by themselves without any hustle, and it only requires your homework or preparation to check it. If they do not allow you for smart contract audit, it’s better to escape from it.
But everyone is not capable of smart contract audit, so there must be a way out to meet this hurdle. Definitely! It is here. It would be best if you trust some third party. Look for reliable auditors who can resolve your concerns. Don’t forget to consider the prior work track record.
Investing in such projects will be profitable and safe if a trustworthy audit firm or entity guarantees that the smart contract code is free of vulnerabilities and there aren’t any loopholes. If not, then staying away is better and safe.
It is highly recommended that without having satisfaction with the proposed project regarding its reliability, do not decide to jump into it. It can finish you.
Preliminary market cap & Token Circulation
For investing in any DeFi venture, you must know everything and perform every possible check to confirm reliability. Token distribution or circulation is an essential factor that ensures reliability.
You must view the token ownership list; if you find a considerable share in possession of the project team, please do not rely on and avoid entering such projects. It is understood that if a token distribution chart is not available publically, it’s alarming, and you should think to fly away from this scam.
The vesting period of any token indicates many points, so it is pretty wise to consider the vesting period of your selected token for investment. Check for the generation event; if none is there and all the tokens are released, it is a huge red flag; you must think of staying out of it because there is no check and balance for throwing coins in the market.
Remember that reliable projects design the vesting schedule and include every significant user, including developers, investors, and buyers, and release tokens periodically, not all at the same time. It is the systematic approach.
Initial market cap is another significant indicator of reliability. Before investing in any coin, you must check the initial market cap of the coin where you want to invest. With a vast initial market cap, there is less chance of a glorious return in terms of profit. If the initial market cap is smaller, there is a greater chance of huge profits. So, try to avoid investment if you find a coin with enormous initial market capital. Here is another suggestion, don’t rely on only one or two indicators. Try to check more of them and decide to conclude them all.
Inference
The outreaching popularity of DeFi-based projects tempts everyone to invest and earn a good return. However, the decision to invest blindly can result in great loss. In this article, we’ve discussed many points that can indicate and help in finding reliable investment projects. Before taking an investment initiative, please check the above-stated parameters and link them together for a better decision.
Detailed research can help you up to a large extent in finding a trusted platform for progressive investment. Always try to find the projects with insignificant risk and more opportunities to grow yourself in a DeFi environment.
Wise decisions can be made on the base of knowledge, so first try to learn and then step forward to earn in the latest online projects. If you do not make a vigilant decision, there are more chances of huge losses and disasters.
Conclusion
Consider all the aspects and then proceed according to your findings. In case a few indicators are alarming with all other positive signs, you can go ahead with precautionary measures.
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