For those who work in the DeFi space, not a day goes by without a project or other “exit scam” reported by their investors. From a sudden withdrawal of support to fake pre-sales, both DeFi experts and inexperienced traders are bleeding the worth of ether (ETH) in these scams.
With DeFi creating a segment of the market where the cost of initiating a project is close to zero, rogue actors now have the perfect environment to continually divert funds away from the victims. With the help and complicity of a multitude of social media scammers and the current climate of frenzied performance hunt of yield farming These crypto scammers are capable of transporting huge sums of money that cost hundreds of millions of dollars.
Instead of helping DeFi democratize access to global finance, the emerging markets niche is being ravaged by fraud. The sheer volume of scams, scams, and other nasty market practices also appear to have contributed to a notable slowdown in prices in the industry as investors have become increasingly reluctant to start new projects.
Crime pays off in DeFi
For scams, those displayed in the DeFi section follow the same basic game book. Anonymous founders create a new project that copies the code of a smart contract from an existing token and makes small changes to parameters such as the overall offering.
Typically relying on the trend that the DeFi market has gained recently, these scammers are flooding Telegram groups and other social media platforms. With the help of “Moon Boys” or paid accomplices with a sizeable Twitter fan base, the project creators spread the word about their supposed new DeFi gem. All of these scams have the same premise: low market capitalization due to a limited supply of tokens, the They guarantee a high income for early adopters or an income of around 1,000%.
With these projects focused on price and little or no consideration of useful technology, the zero-sum game leads to a sharp drop in valuation, so most users have ERC-20 token exchanges. worthless. For Douglas Horn, chief architect of the Telos blockchain network, The success of these scams is based on an unbridled desire to make a quick profit in the cryptocurrency marketas he told Cointelegraph:
“Every time you chase this type of FOMO market action you are already making a mistake because you are betting on your ability to profit faster than the masses knowing that it is impossible for all or even most of the participants to do so. ” This will always cause tears for most participants and is an extremely poor investment strategy. […] Good investments don’t have that much FOMO or time crisis. “
When developers don’t immediately withdraw support, some project developers add malicious lines of code to steal money from their users. Yield farming participants on the dubious UniCats protocol recently saw their token balances being diverted by a fraudulent developer.
Project creators and promoters who hide behind anonymity use the credibility of some crypto investors. In some cases, these rogue actors choose to take the long-term approach of building large following and being against cheating. Once their social media attraction reaches a certain level, they announce an early sale of tokens from a new machine that is generating revenue. Building on the trust of the project creators, investors pile on their ETH and scammers soon disappear with the funds.
Helpful tips to avoid DeFi scammers
Amid the litany of fake currencies popping up in decentralized markets like Uniswap, there is a need to provide investors with useful information to avoid falling victim. Given the novel nature of the industry, there is still a sizeable knowledge gap between investors that makes them easy targets for these crypto scammers. Malcolm Tan, a member of the board of directors of the automated market-making platform KingSwap, told Cointelegraph that investors have a responsibility to conduct their own due diligence.::
“It is very important to look at the team and the founders and check their LinkedIn profiles and those of their consultants to see if they actually have such a project listed. […] Read everything you can to know about the projects and think about how you would get your money back if you put it into the project. This means that projects that don’t even list the location or jurisdiction don’t have familiar faces to look at when it comes to things going wrong, they shouldn’t be touched. “
According to Michael Gu, founder of the popular YouTube channel Boxmining, DeFi investors must adopt the “Don’t Trust, Verify” philosophy. Gu wrote to Cointelegraph advising high yield hunters to become experts in researching DeFi projects. Anyone can easily check “how much code a developer has created to make sure it isn’t lying or beautifying”.and added:
“Spending time researching is key. Personally, I spend up to six hours a day just researching. For now, the best way to avoid fraud is to verify the facts – including looking at smart contract code and GitHub repositories. This is it.” the best part of DeFi as smart contracts are open source and open to anyone for review and validation. “
Since developer withdrawals are possible overnight because the project’s liquidity is not locked, it has become popular with investors to check if the developers of a new token have locked the liquidity using services like Unicrypt. Even if the liquidity is tied, malicious codes hidden in the contract can also represent a back door for fraudulent actors to drain money. For example, in February 2020, hackers were able to exploit a code vulnerability to carry out flash lending attacks on the decentralized lending protocol bZx, resulting in a loss of around 1,139 ETH, worth around $ 1 million at the time.
Assume the luster of a legitimate cryptocurrency niche
Aside from the significant losses suffered by the victims of these scams, the sheer volume of fraudulent activity is said to have affected the entire DeFi market. As with ICOs, bogus projects hamper attempts to initiate the democratization of global finance.
Commenting on the negative impact of these scams, Horn told Cointelegraph that blockchain technology should represent transparency and trust. “Instead, it is more closely associated with these unchecked scams and codes, much like the one that many ICOs’ failure to deliver on their promises helped bring cryptocurrencies down in early 2018.”. According to Horn, the current situation in the DeFi room is escalating even more than during the ICO madness:
“DeFi cycles run much faster. All of this downplays the amazing potential of democratized finance to build powerful systems and self-created derivatives by chaining together many different financial primitives. One day this will change the world, but it won’t.” until there is more stability and quality in the offers. “
There is an emerging trend in DeFi where the market has moved from yield farming to ponzinomics. In the past few weeks, sudden developer withdrawals and fraudulent pre-sales have become a daily occurrence. For Gu, these scams threaten to destroy the excitement and excitement surrounding the DeFi room:
“These scams are affecting people’s interest in yield farming which is the main attraction for people as some projects promise unrealistic returns that have not been seen before. And interest and returns in yield farming are diminishing for fear from people to to fraudsters, the corresponding interest in DeFi generally also loses power. “
However, not all stakeholders share the view that these DeFi scams are the killer for the burgeoning crypto market. Rafael Cosman, co-founder and CEO of stablecoin issuer TrustToken, told Cointelegraph that the DeFi room can address the challenges posed by fraudulent actors:
“All new technology is subject to bad actors who too often adopt early. Cutting-edge technology has often been a magnet for money-making, pornography, or selling illegal goods, but when good and creative people keep building, you get technology like the modern internet. […] I expect DeFi will continue to innovate, consumers will continue to get smarter, and the standards for what proves valuable to use their funds will continue to rise. “