3 Red Flags That A Cryptocurrency Project Could Mislead Investors

Satoshi Nakamoto left a big pair of shoes to fill after posting the Bitcoin code (BTC) in the world, helping to establish the network, then disappearing without a trace.

Over the years the crypto ecosystem has seen many developers and protocol creators rise to become crypto messiahs to loyal holders who eventually see their best plans end in disaster when the protocol is hacked, the rug pulled or abandoned by the developers. .

2022 is barely halfway through and the year has already seen a particularly bad series of good intentions gone wrong, which have collectively helped push the market into bearish territory. Here’s a closer look at each of these cases to help understand how similar results can be avoided in the future.

Some developers are anonymous for a reason

Satoshi may have managed to remain anonymous when Bitcoin was first launched, but in most cases since then having anonymous developers has proven to be a red flag.

Many Anonymous Developers cite personal security reasons for going this route. While this is a valid reason in some cases, sometimes developers hide from past mistakes or plan ahead to cover their tracks in case of future breaches.

A glaring example of this was the Squid Game (SQUID), a memecoin inspired by the Netflix show that jumped 45,000% just days after launch, only for traders to realize that couldn’t sell the tokens on any exchange.

Investors eventually discovered that all developers were anonymous and all social media channels were blocked for comments.

The crypto community has become quite suspicious of Anonymous Developers and it shows in the negative reaction to the revelation that the founder of the non-fungible token project Azuki (NFT) was involved in three other NFT projects which were eventually abandoned. , leaving their holders with little to show except useless jpegs.

Another example of an anonymous developer going rogue occurred in 2022 when it was revealed that Wonderland (TIME) anonymous cash manager @0xSifu turned out to be a suspected financial criminalwith QuadrigaCX co-founder Michael Patryn.

1/ Today there will be allegations about our team member @0xSifu. I want everyone to know that I was aware of this and decided that an individual’s past does not determine their future. I choose to value the time we spend together without knowing your past more than anything.

— Daniele never asks the DM (@danielesta) January 27, 2022

The revelation of this connection led to the collapse of several popular projects, including Wonderland and Popsicle Finance, while a significant amount of criticism was leveled at Abracadabra.Money creator Daniele Sestagalli.

Prior to @0xSifu’s reveal, all three protocols were gaining adoption, but each protocol is only a shadow of its previous success.

Having anonymous developers removes liability from the equation and is increasingly becoming a red flag when it comes to multi-million dollar cryptocurrency protocols.

Beware of the cult of personalities

Finance is no stranger to personality cults and cryptocurrency is no exception.

Long-time cryptocurrency pundits will recall that Roger Ver was called “Bitcoin Jesus” and led the charge to fork Bitcoin Core and create Bitcoin Cash (BCH). Billionaire Dan Larimer also comes to mind, and investors will remember how he helped EOS (EOS) raise $4 billion during the initial coin offering (ICO) boom from 2017 to 2018. In each case, it was a fervent group of followers that propelled each project forward.

Neither BCH nor EOS managed to recover to their all-time highs during the 2021 bull market, despite all the hype around their future when they first launched. Maybe it’s because some of the hype is centered around the personalities behind the projects.

A more recent example includes the collapse of token prices in the Fantom ecosystem after decentralized finance (DeFi) developer Andre Cronje deactivated his Twitter account and informed the community that he was leave the crypto space altogether.

Cronje became so popular that many people would buy a token just because he was involved, and when he left many of those investors dumped their holdings, which negatively impacted token prices.

Previously at the brand/marketing da Fantom was Andre Cronje.
Now we don’t have that identity.
It’s not a suggestion to focus on branding/marketing at this time, it’s an absolute necessity.

— Jack the Oiler (@Jacktheoiler) May 7, 2022

While Cronje was doing what he thought was right and had no ill intentions towards the community, his actions appear to have negatively affected the cryptocurrency market due to his popularity in the community and the dedication of his followers.

The main lesson is to be vigilant when a developer is deemed unable to do anything wrong and to remember that cult-like followers can have results that go beyond their community.

Decentralization requires community involvement

Another red flag to watch out for are Decentralized Autonomous Organizations (DAOs) and DeFi protocols that operate in a way that seems more centralized than the name suggests.

It is common for many protocols to claim that they are decentralized, but rely on centralized service providers such as Amazon Web Service to ensure that they work properly.

Due to a major AWS outage, the dYdX exchange is currently inactive. We are seeing increased latency in services and impaired functionality with endpoints not working and the website not loading.

For the latest status updates, subscribe to: https://t.co/EvjpZdRyby

— dYdX (@dYdX) December 7, 2021

Another relevant example is when a project that claims to offer governance rights to token holders makes an important protocol decision without consulting the community for comment and approval.

The action of the Earth (LUNA) to add BTC to its treasury as collateral for the stablecoin TerraUSD (UST) made headlines and was hailed by many, but the action was never voted on in the Terra community to see what token holders thought.

While there’s a good chance the plan will pass and Terra’s collapse has yet to happen, the blame may have fallen more on the community and less on Do Kwon, the project’s leader. It’s also worth mentioning that Do Kown has developed a cult of personality and frequently insulted various people on Twitter.

One of the main tenets of the cryptocurrency industry is respect for decentralization and failure to do so often leads to a compromised network and disgruntled investors.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should do your own research when making a decision.

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