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How to define and prevent scams in the Decentralized Finance | DeFi

27.10.2021
How to define and prevent scams in the Decentralized Finance | DeFi

Scams in Decentralized Finance (DeFi)

The growth of Decentralized Finance (DeFi) results from the fact that it attracts a huge number of users. In this regard, this is the reason of appearing of fraudulent projects, which are becoming an increasingly serious cause for concern. However, there are ways to easily and quickly detect DeFi scams.

According to CoinGecko, DeFi owns 475 exchanges, 7609 coins, and a market capitalization of about $1,615,395,404,539. Therefore, it makes it difficult to define good projects from bad ones.

It should be noted that DeFi’s decentralized and permissionless nature also makes it very difficult to recover your funds in the case of fraud. Thus, prevention is always the best way to cope with scammers.

How to define and prevent scams in the DeFi space?

There are several ways to recognize and prevent fraudulent projects:

You should determine if the project adds something new to the DeFi space.

The main problem is that most crypto-assets is that they don’t bring innovations to the industry. The vast majority of new projects are just trying to get attention, without even trying to improve the use of the coin or bring something new. Thus, before choosing a project, you should pay attention to the following points:

  • Does the project have innovative potential?
  • Does this project differ from competitors' projects?
  • Does it have a unique and valuable proposition for users?

These questions are quite simple, and due to them, you will be able to sift most of the DeFi fraud projects.

 

It is necessary to check if the project has any information about its developments or a roadmap on the project website.

Most legitimate projects provide their users with information about updates on their websites or social media pages. If the project hasn't developed anything since it was started, you should ignore this project.

 

You should check the development activity.

The idea of DeFi is based on the concept of open-source development. If you have a little bit of knowledge of programming, you can check the code by yourself. The great advantage of open-source is that it is easy to get access to it. Therefore, if it is a scam project, you will be able to determine it. Also, you should check the development activity. If the developers often update the code, so the project is real.

 

Audit of smart contracts.

Smart contracts and DeFi are often audited. The aim of such an audit is to check if the code is secured or not. Although it is an essential part of smart contract development, many developers miss this step and run their code without audit.
It is worth noting that the audit of smart contracts costs a lot of money. All legal projects always pay for an audit, but fraud projects never do it.

 

The anonymity of developers.

If the project development team is anonymous, this does not mean that they are scammers. However, teams with anonymous developers are still a source of additional risk, as if the team turns out to be scammers, you will not be able to bring them to justice. Thus, we can infer if the team of the project is famous, it is a big chance that they will not put their reputation on the line and will not be scammers.

 

Distribution of the tokens

Before you make investments into some project, you need to pay attention to such an aspect as tokenomics since some projects can artificially inflate the price of their token. If you invest in such a project, you will lose your money.

Also, it is necessary to get information about the distribution of the tokens.
Token distribution models have many things to take into account. Unfortunately, many projects don't even provide this information, which is considered a red flag. Therefore, it is crucial information when you choose a project.

 

Is there a threat of exit scam?

One of the new ways to launch DeFi tokens is profitable farming (liquidity mining).

This distribution method is used by many DeFi projects, as it helps to engage new users effectively. The bottom line is that users lock their coins in smart contracts and receive a part of the issued tokens for this.

Unfortunately, scammers also use this method. Some projects will simply take funds from the liquidity pool. Another part of the projects will use more sophisticated methods or organize large-scale pre-mining first.

As for a rug pull, it is a kind of scam in the crypto industry where developers leave a project and run away with users’ funds. Rug pulls tend to be in the DeFi ecosystem on decentralized exchanges, where scammers create a digital coin and list it on one of the decentralized exchanges, then bring together these tokens with leading cryptocurrencies like BTC and ETH. Then, the developers withdraw every coin from the liquidity pool, driving the coin’s price to zero. As a result, investors lose their investments.

Why is it worth investing in the DBX project?

The DBX token is based on two blockchains; thus, it is one of the reliable ways to invest in the DeFi space. It is developed on the Quark algorithm and the ERC-20 protocol. As everyone knows, the Quark algorithm provides protection against hacking and helps to increase the speed of transactions. Besides, “DBX” uses a proven and highly efficient anonymous Zerocoin protocol, ensuring the security and anonymity of information and transactions. Thus, the developers were able to provide their clients with entirely anonymous and secure use of tokens.

 

ERC-20 protocol makes transactions flexible, and due to it, users can quickly access DeFi space.

If a user wants to get rewards by paying the system not huge transaction fees, he can access the blockchain that is based on the “Quark” algorithm. In this way, the user can ensure that information related to transactions is completely safe and anonymous. If a user wishes entry into other blockchains rapidly, he can use the SWAP function provided by the ecosystem DBX. This function will ensure the transition to the “ERC-20” blockchain.