It Is Not Much Challenging to Protect Yourself from DeFi Scams.

Decentralized Finance is an alternate financial universe that consists of numerous applications running autonomously. There are talks that securities laws can be implicated in DeFi space, but their enforcement is not that simple.

Lack of regulations in decentralized space is bringing the criminals’ scam tactics into the DeFi world. Out of all the major hacks in 2021 till now, DeFi hacks accounts for almost 75%.

Two kinds of DeFi scams are often there:

The first scam is where any outside agent hacks the protocol to extract the funds, and the second is rug pull scams. Now, the rug pull scams involve numerous people without a considerable level of marketing. In simple words, here, the scammers pump the price of a new coin, and later on, they get disappeared with the money of investors.

You might be thinking about how is it even possible to list a fake coin to trade. Well, it is not much difficult to list a coin. It can be done without auditing. The scammers manipulate the price of the coin by taking out flash loans. Here, the attacker borrows thousands of dollars of Ether, extracts the dollars in stolen assets and pay back the ETH loans. It is possible because every smart contract executes different steps serially. So, when the borrower doesn’t have money to pay back the loan instantly, then the transaction is rolled back.

In the first kind of scam, the hacker exploits the small loophole of different defi protocols and makes money. You might have heard numerous cases of scams recently, including the hack in the poly network.

How can you avoid these scams?

So, the question is, can you really protect yourself from these defi scams? Well, it is not always possible to protect yourself cent per cent. But, with specific measures, you can definitely avoid scams to a significant extent. 

Let’s consider the four broad ways to keep you safe:

1. Research properly- The foremost thing to look at before investing is the person behind your investing project. The easiest method to do this is to look for the LinkedIn profiles of the team members because you can easily see the history of the accounts. Keep in mind that it is always required to know the people behind that project. Another thing to do research is the DeFi project which you are interested in. you can look for their roadmap and are prepared to face the challenges of the market.
2. The authenticity of the smart contracts- The smart contracts should be public. In some cases, the smarts contracts can be public as well because of forking considerations. In that situation, you should see if their team is reputed and fully verified. The anonymous team with the private smart contracts is never a great idea to go with.
3. Initial market capitalization- Always check the token distribution before making your investment decisions. For instance, it is alarming if the distribution chart is not made public and if the team itself possesses a significant portion of coins.
4. Look for its early investors- Looking for well-known investors might prove to be a great idea. You can simply look for the investors and advisors in the early rounds. You must know that if a defi project is backed by trusted investors, there are many chances to recover the loss, even in the case of hacking.

Closing thoughts

Decentralized Finance is a hot topic all over the world, and with its growth, scams have also grown in this space. It is always suggested to stick to the established tokens instead of considering a newer one. It does not mean that you should never try to invest in some different coin, but proper research is much needed before investing your money in any digital currency.

You need to be very cautious with your investments and look for the red flags, if any. It is not always complicated to be safe, and the steps mentioned above can undoubtedly prove to be helpful in this regard.