Posted: 08.07.2021 | 03:56
How to Spot Scams in DeFi?
As more people become interested in the fascinating financial innovations that DeFi makes possible, scammers are finding more ways to take advantage of them. Decentralized Finance (DeFi) is filling its system with innovations day by day. It can be challenging to keep track of as new DeFi projects are released every minute.
The fact that blockchains are permissionless and decentralized is basically a way of saying they are “public”. No one needs permission to use, develop or start projects on blockchain. Although this value is inherent in cryptocurrencies such as Bitcoin, it can also have negative aspects.
Fraudulent or misleading projects can be started and there is no way to stop them. However, some precautions can be taken to avoid them. So, what should be paid attention to?
The Goal of The Project
This topic can be seen as one of the most obvious questions to ask, especially if you are new to the DeFi system. However, the vast majority of crypto assets are also not constantly innovating. However, many new projects are just trying to attract attention in the DeFi field without even trying to innovate. So the issues to be learned should be whether the project is trying to do something innovative, how it differs from its competitors, and how it will contribute to the world of the digital economy. In this way, fraud can be avoided.
Another issue to look at is developer activity. DeFi is closely intertwined with open source ethics. So, if you are familiar with coding, you can review the code yourself. The great thing about open source is that if there's enough interest in the project, others will certainly do it. This can reveal whether the project is malicious or not. Thus, you can be informed about whether the developers are constantly submitting new code and whether the developers are genuine.
Smart Contract Controls
Control of DeFi projects can be achieved with smart contracts. With these checks, it is necessary to make sure that the code is safe. Although smart contracts are an essential part of development, many developers distribute their code without any supervision. This can greatly increase the risk of using these contracts. One thing to note here is that inspections are expensive. Legitimate projects can usually pay for audits, but this doesn't usually bother scam projects.
But if a project has control, that doesn't mean it's completely safe to use. Audits are required, but no audit means complete security.
Are Founders Anonymous?
It is deeply entrenched in the crypto universe, in the freedom of anonymity the Internet can provide. The identity of Satoshi Nakamoto, who created the first cryptocurrency, is still unknown.
However, there is a possibility that teams with anonymous founders have an additional risk that you should consider. This gives them a good chance as they can't be held responsible if they turn out to be scammers.
But not all projects managed by anonymous teams have anything to do with fraud. There are many examples of legitimate projects created with anonymous team.