Many crypto enthusiasts would claim that Decentralized Finance (DeFi) is the revolutionary next step in finance. However, there are significant drawbacks to DeFi inventions as well. The sector is rife with scams, fraud, hacks, and other risks. It could take some time for the industry to find a solution to these problems. So, if you’re thinking of venturing into the space, this article should help you stay safe.
What is DeFi?
DeFi, short for Decentralized Finance, is an emerging financial technology. Based on secure distributed ledgers similar to those used by cryptocurrencies, DeFi consists of stablecoins as well as software and hardware that enable the development of applications.
DeFi applications challenge the centralized financial system. How? Well, by relying on digital exchanges based on peer-to-peer technology, DeFi users bypass the need for a centralized banking system. As exciting as it sounds, the realm is often hit by hacks and scams. So it’s important to know how to play it safe while using DeFi and how to spot a scam.
Various ways hackers commit cryptocurrency fraud
Many blockchain projects are open source. So anybody can access the code, and people with malicious intent will likely discover such flaws and use them to steal funds. Plus, the results can be extra disastrous if the developers who create the DeFi magic don’t do enough to protect their users
The code can be examined and corrected through a third-party audit, but it’s a pricey affair. Many projects struggle to find finance, even for essential development. And finding the money for an audit is a lot more challenging.
Besides, when developing payment systems, communicating with other payment systems smartly, and performing additional duties on more prominent platforms, they may become open to attacks. Finally, the developers of some projects themselves turn rogue. More on all this is below.
How to recognize crypto and DeFi scams
The following frequent scams ought to be on the radar of every DeFi trader, even if it is hard to stop crypto theft and fraud across the sector.
Rug pulls
A rug pull occurs when developers advertise what seems to be an innovative, exciting concept. They develop a fan base and amass funds, totaling hundreds of millions of dollars, from investors. Then, one day, the developers sell the tokens, take the money, and vanish.
Such developers may or may not have intended to pull off the fraud. You can tell whether a developer is pulling a fast one by studying the project, verifying credentials, observing how the developers interact with their community, and examining the token distribution plan.
Social media scams
Celebrity impersonators sometimes contact crypto fans about new projects. They may even pretend to run contests and lure participants with giveaways. They then ask you to donate money to a particular address.
Thankfully, it is often simple to determine whether an account is authentic. Such accounts frequently contain simple grammar and spelling mistakes. Many websites and email address providers verify celebrity accounts too. Just make sure you don’t ever reply or transfer money to any account without vetting it first.
Phishing scams
Phishing is a practice where con artists pose as reliable businesses to steal personal data. For example, DeFi phishing often involves a malicious link or attachment sent to you by someone posing as the service provider or protocol. Remember never to click any links or download anything from an unreliable source.
Honeypot scams
Cryptocurrency assets are erratic, but if a new token rapidly increases in value without any buyers, it is a DeFi warning sign. In the case of a honeypot, the token’s growing value attracts many purchasers, but fraudsters control the wallet permitted to trade the token via a smart contract. There are tools to assist you in spotting honeypot scams. For instance, you could use Etherscan on the Ethereum network or BscScan on the Binance Smart Chain.
General security measures to follow
While it’s important to watch out for frauds and scams in DeFi, some basic strategies can help protect you. Here are a few of the most common ones.
Always use Two-Factor Authentication (2FA)
2FA is a safety mechanism that delivers a text message or an email to a confirmed account. No matter the area of DeFi one chooses to invest in, all systems should support 2FA in some capacity.
Use a hardware wallet
Users can keep their private keys on hardware wallets, which are external devices. In addition, the number of decentralized applications interoperable with hardware wallets is growing as the DeFi industry matures. This enables users to keep their funds in a secure location while still having easy access to their preferred DeFi platforms.
Investigate the community
Successful DeFi initiatives frequently foster a thriving community of engaged developers and users who regularly exchange ideas. Communication is essential to designing a platform that everyone can use securely. Developers who are silent or inactive on a project might be plotting fraud or another ruse.
Look out for fake Google ads
Search engines like Google do not confirm the authenticity of the search results. If you cannot locate much data on the first outcome of your Search on Google, this is a DeFi danger sign. The first result is typically not an accurate response, so stay wary.
Equip yourself to spot exploits and vulnerabilities
Since DeFi protocols are digital programs that run on code, they may be susceptible to specific faults that make them open to fraud. Efficient automated tools are an excellent place to start, even though they are not flawless. You could look for free tools to help you analyze the project and raise red flags.
Conclusion
Some believe that DeFi is the financial system of the future. Whether or not that becomes a reality, DeFi does make our transactions easy and risk-free. However, remember to stay mindful of the red flags we’ve discussed above.
FAQs
How can you avoid DeFi scams?
There is nothing in place to prevent the establishment of dishonest or fraudulent projects. So, as a community, we should work to educate ourselves and others, so we know how to distinguish between real breakthroughs and junk or danger. We strive to do that with this article. What will you do? (You could share this piece, perhaps?)
How can you protect yourself in the DeFi space?
The following safety measures can be useful. Ensuring your private key stays private by not disclosing it to anyone. Even if the other person is a group administrator or project team member, also, a considerable amount of crypto should never be kept online. Always store your tokens offline or in a hardware wallet. Finally, avoid clicking on all unknown website URLs—especially when they are airdropped randomly.
3. How do you spot scams in decentralized finance DeFi?
One method a con artist might profit from fraud is to inflate the token price while amassing a sizable position, and then tossing it on the market. As they say, anything that looks too good probably is. So always, DYOR. That’s the only way to spot a scam—that, and (re)reading this article.
4. How do I protect my DeFi wallet?
It’s always best to save larger sums of crypto in a hardware wallet or offline. And NEVER give anyone else access to your wallet’s private key. Not even if they are a group administrator or project team member.
