The decentralized finance (DeFi) industry offers many opportunities to make money through funding projects. cryptocurrencies and tokens related to various products, such as games, artwork, and the metaverse. However, this new universe full of applications that simulate banks or traditional brokerage houses, but without intermediaries, the lay and even the most experienced investor is prone to fall into the trap of scams.
O Bitcoin Portal shows in this article some well-known scams in the decentralized world of cryptocurrencies and provides expert advice that can help the new investor avoid the pitfalls.
But first, let’s come to the concept of Challenge and the most popular types of scams in the crypto market.
What is DeFi
Unlike the traditional financial system, DeFi are not dependent on brokers or banks, as they have a self-executing system that works via smart contracts on the networks. block chain. These contracts, also known as “protocols”, circulate on decentralized exchanges (DEX).
Smart contracts are always tied to a crypto asset to obtain liquidity, usually through Ethereum and Binance coin funding, needed to launch the product – which may be a metaverse ecosystem, for example. Thus, if the project is successful, the investor will benefit from the rise in the price of the asset. Many projects have been successful in this way.
But this structure is also followed by scammers who artificially inflate the price of the asset to raise funds and then disappear from the map.
Types of DeFi hits
- The scammer steals all the cash from DEX;
- The protocol developer manipulates the “approve” function of the smart contract so that the cryptocurrency holder cannot sell;
- The creator of the project robs the investor even before issuing an asset, after raising funds with an initial offering of cryptocurrency (ICOin the acronym in English);
- The hacker exploits a loophole in the protocol and steals any funds he finds.
It should be remembered that even good projects – including those approved by the crypto community and also by experts in the field – may contain flaws and open doubts about a scam. An example is the recent case of Terraforms, which left many pundits speechless, with the fall of the cryptocurrency Terra (LUNA) and the stablecoin TerraUSD (UST).
The Terraforms project, created by South Korean Do Won, failed to use algorithms to perfectly control the price of an asset. But it worked until a few days ago when the whole ecosystem collapsed.
In DeFi, “the risk is all ours”
“[Eles] have social networks? Did the creators of the protocol participate in other projects? The sentences are from Viviana Maria Schwengber, trader at Bitcoin marketwho was contacted by the report to comment on the matter and provide cautionary advice to readers.
Schwengber warns that if it is a token, it is possible to see if it is listed on platforms such as Coinmarketcap or Quinceko. In the case of a protocol, it is important to know who is behind its creation. ” You can consult LinkedIn” he explained.
“I understand that people don’t want to be left out of market news — and they can’t. We can’t miss the opportunity to monetize further, but we have to be careful,” the trader said.
As everything is still at the beginning, there are some bugs that hackers can benefit from, such as, for example, in the decentralized lending modality, he explains. “Many users lost the cryptos they placed as collateral.”
Another point concerns what has been invested in the project. According to Schwengber, every project needs some initial capital: “A good tip is to try and see if you already have a list of investors and who they are, and if the team doesn’t own a large chunk of the tokens. . This is an important point, “because they can use these tokens both to consume and to manipulate the price.”
“This operation has no middleman, so you are exposing yourself to the decentralized world that is just beginning. This is why the chances of profits are greater, as well as the risks. There is also no point in trying to then turn to the authorities of the traditional financial system, because without an intermediary, the risk is ours”.
“If it sounds too good to be true, it probably isn’t.”
When it comes to DeFi protocols, “there are always red flags,” commented Lucas Pinsdorf, new business specialist at the Bitcoin marketwho didn’t hesitate to quote the old maxim: “if it sounds too good to be true, it probably isn’t”.
He cited as an example a completely anonymous or very new project, which has no market history to know what happened to it before, or in which none of the people involved in the project can be identified:
“People who are helping the protocol grow, who founded or published the initial code and you can’t find LinkedIn or Twitter, for example.”
Another thing, Pinsdorf continued, are the many “win with this protocol” incentives. According to him, this usually has a few critics. “For example, the guy just posted the protocol and it says ‘60,000% a day’. So you wonder how durable that is and how much sense that makes for something that should be solid in the end. So it could be a scam because scams have all these things,” the expert said. And added:
“If have [indícios]it’s usually good to be smarter, more careful, to always go on social networks because sometimes there are already people complaining [do protocolo]: ‘I deposited here, where is my fund’”.
Pinsdorf also suggests checking if a recognized security company in the market has already audited the smart contract. However, he explained, “to the extent that these companies make [a auditoria] It’s not without risk either, but it improves a lot, as you reduce a lot of the known attack vector.
Pinsdorf also suggests that when in doubt, the investor looking to trade should look for DeFi that have been in the market for a few years, such as Waves and Compound.
“It does not dispense either, but the risk is much lower… And it lets you venture into more experimental protocols when you understand a little better what is or is not something reliable”, he concludes.
Carpet Pulling Scams in DeFi Protocols
The acceleration of the DeFi sector, stemming from the hype of NFT (Non-Fungible Tokens) games, has become a perfect space for scammers to exploit investors’ lack of knowledge. One of the most applied moves in recent times has become known worldwide as the Rug Pull (or rug pull, in Portuguese).
The carpet draw scam is nothing more than the abandonment of a project by its creator after raising funds from investors. The phenomenon, however, is just a sprig of other well-known scams, but with a new bait, cryptocurrencies.
One of the most well-known cases is that of the Squid Game (SQUID) cryptocurrency meme, which took place after the hype of the Netflix series “Round 6”, which was released in September 2021.
The SQUID token appeared out of nowhere on October 26 at $0.02, hit $90 in the early hours of November 1, and fell to zero four hours later. That is to say, in less than a week, the rug draw plan was executed.
Another famous case is that of OneCoin, a currency that never existed – that is, the project never started. And the creator of the coup, the Bulgarian Ruja Ignatova, ‘raised 5 billion US dollars from investors and has not been found to date.
Thodex was another. In 2021, in Turkey, a carpet circulation of 356 million Turkish liras (about 24 million dollars) was applied through the cryptocurrency exchange. Earlier that year, the company’s website was taken offline and its founder disappeared, becoming part of Interpol’s red show.