How to Detect Scam Projects in the Decentralized Finance (DeFi) Industry

LATOKEN does not provide investment advice; this article is written for informational purposes only. Like many other assets, cryptocurrencies are subject to high market risk. Please trade with caution.

Every day, more and more people are showing interest in the innovations in the finance world, which became possible thanks to DeFi. Crypto scammers are also finding more ways to take advantage of the low level of knowledge among newbies.

With DeFi, things are much more complicated since there are no reliable ways to recover funds or bring cybercriminals to justice. However, if you know exactly what to look out for, you can reduce the risk of fraudsters taking advantage of you.

Decentralized finance (DeFi) is closely related to innovation. It seems like new projects in the DeFi industry are launched every minute and are extremely difficult to keep track of.

We often talk about blockchains being inclusive or generally available. Anyone can use them, code for them, and launch projects. This, as you might have guessed, also has negative sides.

Indeed, anyone can organize fraudulent or misleading scam projects. LATOKEN specialists want to help their users identify patterns by which everyone can distinguish real projects from scams.

Find out more about the goal of the project

The fact is that the overwhelming majority of crypto-assets do not bring anything new to the industry. Many new projects simply try to get noticed without even trying to bring anything new.

Ask yourself: “Does this project have innovative potential?” “How does this project differ from competitors’ projects?” “Does it have any unique value offer?”

Yes, these questions are undoubtedly straightforward and logical. But by answering them, you will sift most of the DeFi scam projects.

Development Activity

Another thing to look out for is development activity. The idea behind DeFi is related to the concept of open-source development.

If you know a little about programming, you can explore the code yourself. However, the great thing about open source is that enough interest in the project attracts new interested people. Therefore, if scammers create a project, it will most likely be detected.

Smart Contracts Audit

Smart contracts and DeFi are audited frequently. The purpose of an audit is to check the safety of the code. Even though it is an integral part of the development of smart contracts, many developers run their code without audit. Thus, the risk of using this kind of contract increases.

It should be noted that audit costs a lot of money. Legal projects can usually pay for an audit, but scam projects are not really interested in it.

The Anonymity of the Creators

As you know, anonymity is essential in the crypto world. Anonymous founding teams are still a source of additional risk. If they turn out to be scammers, it is unlikely that it will be possible to bring them to justice.

Obviously, not all projects of anonymous teams are fraudulent. There are many examples of legal projects with anonymous teams. However, it is worth considering such risks as well.

So, are projects with anonymous founders bad? No. Is it more difficult to prosecute projects with anonymous founders for scams and fraud? Yes.

About the “Exit Scam” and “Rug Pull”

Liquidity mining is a new way to launch DeFi tokens. Many DeFi projects use this distribution method as it helps to effectively engage new users. The bottom line is that users block their funds in smart contracts and receive some part of the issued tokens.

Where do we come to? Some projects will simply take funds from the liquidity pool. Others will use more sophisticated methods or organize large-scale ‘premining’ first.

As for a rug pull, it is a maneuver in the crypto industry where developers abandon a project and run away with investors’ funds. Rug pulls usually happen in the DeFi ecosystem, especially on decentralized exchanges (DEXs), where scammers create a token and list it on a DEX, then pair it with a leading cryptocurrency like BTC and ETH. 

Once a significant amount of unsuspecting investors swap their coins for the listed token, the creators withdraw everything from the liquidity pool, driving the coin’s price to zero. The coin’s creators may even create a temporary “hype” around on different social media platforms and initially inject a substantial amount of liquidity into their pool to cultivate investor confidence.

It doesn’t matter if you want to step into the wild field of profitable farming or just use decentralized protocols for exchange and trade — do it with caution! Scams abound in the rapidly evolving DeFi infrastructure. We hope this article will help you better identify scam projects.