It's only a matter of time for a system that proves profitable to be infected by the bad guys. This is what many of us have been experiencing in DeFi projects as over $300 Million estimated value has been lost to hack in DeFi since 2019.
This article will reveal some bullet points to watch out for should you want to play safe with the DeFi project. Read carefully.....
The evolution of DeFi has been an ecosystem for all financial solutions that have no central authority and its operation relies on three features which are:
The advantage that DeFi brought to the crypto space by giving its users the opportunity to privacy by removing the need for middlemen to create a new stream of the financial systems that works in a permissionless and open way has now open door to many projects with great innovations and increase the adoption of this financial solution within the space.
Now let's see what then exposure DeFi to hacks and scam
Yes, there are different factors responsible for hacks/scams as far as DeFi is concerned. Let's go through some of them:
All DeFi platforms since its open-source require no regulatory authority for their management, hence, it is very easy for a scammer to do away with people's funds and to recover lost funds is impossible.
From the characteristics of DeFi, the operation is carried out by smart contract and known that blockchain is permissionless, it allows anyone to launch scammy projects or clone existing ones.
We have list of many projects in this category and many have lost so many funds.
Different innovations around DeFi have made many investors enter the ecosystem even those that don't understand the space are attracted to it and due to this, scammers take advantage of investors that lack knowledge about the space.
I won't want to mention any scammed project but I will share how to avoid anyone that looks like them
1. Project's Purpose
When you discover a new project in DeFi, kindly find out the following:
Does it set to improve the digital economy?
Will the idea yield value?
There are still some questions you can ask, but if your answer is no, then you need to pick a race and close up.
Should you stumble at any new DeFi project, then, it must have a clear purpose before you invest in it.
2. Check The Identity of Founders
Yes, the first digital asset (Bitcoin) was founded by Satoshi and the identity is still anonymous and this is what many leverages to hide under the mask to release a project. I am not saying they're no good projects with unknown founders, however, you need to be careful.
The moment you can't find information of people behind the project, this is one of the litmus tests to determine a scam project. If you find out about the founders, check if they have the previous project and check out their achievements, this will guide you on way to go.
3. The Distribution of Utility Token
Inflation in token price is one of the determining factors of a DeFi scam. The founder of such a project will hold on to about 51% of the token, which they dump in the market and collapse the entire market of such coin.
When you grab a new project, search for the tokenonics of the coin and check the team allocation/ distribution of token.
You need to also check for the project with presale and be sure that no core team/insiders receive huge amounts of the coin because they will be the ones to promote the coin on social media to lure many into the project. I am not a fan of airdrop not that I don't like it or I don't want free money, as this usually leads to sell pressure and kill the value of the coin. Recently, some projects started to strategize how to airdrop claim is distributed to guide against the dump.
4. Contract Audits
With my engagement in DeFi, auditing a project does not guarantee security but at least reveal how much you can rely on such a project team. When the smart contract is audited, it means that the code is secure and because the process is costly, the scammer opted out.
The moment you sighted that a project smart contract is not audited, it's a red flag, stay clear.
5. Project Development
A new project must continuously release its development activities to show that the project is active with a good technical team.
The more the release update, the better the future of such a project.
In conclusion, certainly, I may not give you all information to guide you in the selection of a good DeFi project to invest in, but the points mentioned here can serve you to some certain level in your research.
You can check the article on Binance academy, titled: How To Spot Scams In Decentralized Finance (DeFi) and learn more.
Register on Binance Exchange and earn some free coins to start your journey.
Buy and Sell Crypto on Binance Exchange
Disclaimer: I am not a financial adviser, use all information here slightly for education.
