For those who work in the decentralized financial sector, hardly a day goes by without reports that one or the other project is “cheating” its investors. From carpet drawing to fake advance sales, DeFi experts and beginners alike are bleeding valuable ether (ETH) from these scams.
With DeFi creating a market segment where the cost of project initiation is close to zero, fraudulent actors now have the perfect environment to continually suck funds from victims. Aided and abetted by a rabble of social media shills and the current climate of frenzied profit hunts, these crypto scammers can cart away huge sums of money that can run into hundreds of millions of dollars.
Rather than DeFi helping to democratize access to global finance, the emerging markets niche is being inundated with fraud. The sheer volume of scams, rip-offs, and other unsavory market practices also appear to have contributed to noticeable price cooling in the industry, with investors increasingly watching out for new projects.
Crime pays off in DeFi
As for cheating, the ones displayed in the DeFi section follow the same basic playbook. Anonymous founders create a new project, usually copied from the existing token contract code, and make minor changes to parameters such as the overall offering.
Typically relying on the trend that recently gained favor in the DeFi market, these scammers tend to flood Telegram groups and other social media platforms. With the help of “Moon Boys” or paid shills with a considerable Twitter fan base, project creators bring word of mouth about their supposed new DeFi gem. All of these scams have the same premise: low market capitalization, caused by a limited supply of tokens that guarantee enormous returns or profits of around 1,000% for early adopters.
However, since these projects focus on price and have little or no regard for useful technology, the zero-sum game turns out to be a sharp drop in ratings, with most users holding bags of worthless ERC-20 tokens. For Douglas Horn, chief architect of Telos’ blockchain network, the success of these scams stems from an unbridled desire for quick wins in the crypto market, as 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 make a profit by going faster than the masses and knowing that it is for everyone, or even most Participant is impossible to pull this off. This will always cause tears for most participants and is an extremely poor investment strategy. […] Good investments are not at the level of FOMO or time crisis. “
Some project developers add malicious lines of code to steal money from their users. Yield farmers under the dubious UniCats protocol recently saw their entire token balance being withdrawn by a fraudulent developer.
Project creators and project promoters, who hide behind the anonymity, take advantage of the gullibility of some crypto investors alike. In some cases, these rogue actors choose to take the long-con approach of building a large following and being against cheating. Once their social media pull has reached a certain level, they advertise a token presale for a new machine that will generate income. Due to the trust of the project creators, investors pile up at their ETH and the scammers soon disappear with the funds.
Useful tips to avoid DeFi scammers
Amid the litany of counterfeit coins listed on decentralized marketplaces like Uniswap, there is a need to provide investors with useful information to avoid falling victim. Given the novel nature of the sector, there is still a significant knowledge gap among investors that makes them easy targets of these crypto scammers. Malcolm Tan, board member of the automated market-maker platform KingSwap, told Cointelegraph that investors need to do 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 listed the project in question. […] 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 the projects don’t even state their location or jurisdiction, and don’t have familiar faces to see when things go south, they shouldn’t be touched. “
According to Michael Gu, founder of the popular crypto YouTube channel Box miningDeFi investors must adopt the “don’t trust, verify” philosophy. Gu wrote to Cointelegraph advising the yield hunters to familiarize themselves with researching DeFi projects.
“Spending time on research is key. Personally, I spend up to six hours a day doing research alone. For now, the best way to avoid fraud is to check the facts. That includes looking at the smart contract code and GitHub repositories. This is the best thing about DeFi because smart contracts are open source and open to anyone for review and validation. “
Since rug-pulls are possible due to the unlocked project liquidity, it has become popular for investors to check whether the developers of a new token have locked the liquidity using services like Unicrypt. Even with blocked liquidity, 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 credit attacks on the decentralized credit protocol bZx, resulting in a loss of around 1,139 ETH worth around 1 million US dollars.
Take the luster of a legitimate crypto 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 the first coin offerings, counterfeit projects hamper attempts to advance the democratization of global finances.
Commenting on the negative impact of these scams, Horn told Cointelegraph that blockchain should represent transparency and trust. “Instead, it is most clearly associated with these scams and unchecked code, as well as the failure of many ICOs to keep their promises to drop crypto in early 2018.” According to Horn, the current situation in the DeFi room is escalating even further than it was during ICO madness:
“DeFi cycles run much faster. All of this compromises 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 only when the offers are more stable and of higher quality. “
In the DeFi area, a trend is emerging in which the market has moved from yield farming to “ponzinomics”. In the past few weeks, carpet pulls and fraudulent pre-sales have become commonplace. For Gu, these scams threaten to drain the hype and enthusiasm surrounding the DeFi room:
“These scams are affecting people’s interest in productive farming, which is the main draw for people as some farms promised unrealistically high returns that have not been seen before. And as interest and returns in high-yield agriculture decrease due to people’s fear of fraud, the corresponding interest in DeFi in general also loses power. “
However, not every stakeholder shares the opinion 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 cope with the challenges caused by fraudulent actors:
“Every new technology is exposed to bad actors, who all too often are deployed at an early stage. Edge technology has often attracted money fraud, pornography, or selling illegal goods – but if good, creative people keep building, you get technology like the modern internet. […] I expect DeFi will continue to innovate, consumers will keep getting smarter, and standards for what is worth your money to keep rising. “