Spot scams in Decentralized Finance (DeFi)

Spot scams in Decentralized Finance (DeFi)

Along with the development of DeFi, the augmentation of scamming by scammers is also being seen. The biggest limitation lying here is once your fund is grabbed by malicious actors, it becomes irrecoverable forever.

If you ask me which is the most innovative space? I will answer you DeFi without any delay. Blockchains are permissionless is the reason of the innovation.  But the space needs more advanced solution to identify if any misleading projects are launched on it.

Objective of the project

It is a complicated question to answer and we know that a good majority of crypto assets don’t bring anything new to the table. DeFi is based on the ethos of open-source. Little knowledge of coding drives you to go ahead. Involvement in the project depends on one’s intention. Developers’ continually shipping of new code is the measurement for finding out whether developers are for real or want to earn a quick profit.

Smart Contract audits

You can confirm your code to be secure through audits. But many developers deploy their code without audits which accelerates the risk of using these contracts. Scam projects won’t go for audits as it is expensive. But don’t think that audits will provide you complete safety. Rather than that it makes someone know about his risk on his deposited funds into a smart contract.

Anonymity of founders

The ethos of crypto industry is based on anonymity that you can feel if you know the identity of Satoshi Nakamoto. So disengaging the word anonymity from crypto space is impossible. You are walking on a risky surface if you involve in a project of anonymous founders. You can lose everything providing that the project where you are in is a scam. But there is a slight difference in the case of on-chain analysis tools as these are getting more and sophisticated. But there are many legitimate projects with anonymous founders.

Token Distribution

Token distribution is a big topic, and there are different ways and aspects to consider. Drawing a picture of the project requires necessary information. But to make a quick buck, scammers can inflate the token price holding a large amount and dump it on the market leaving the token price drop. As a result of this, the value of the token can get lost. It causes a problem down the road when a significant founder allocation isn’t in itself deemed a red flag by some.

How likely is an exit scam?

DeFi introduced a new distribution method which is known as Yield farming. As per the systematic approach, users lock their funds into smart contracts and get a portion of the newly minted tokens in return. Whereas some use more complicated methods, some take the funds in the liquidity pool. New altcoins like Uniswap often get listed on automated market makers (AMM).

But in both the approaches, scams are available. But some guidelines alleviate the risk of malicious actors to some degrees.

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