The Decentralized Finance (DeFi) industry offers many opportunities to cash in on cryptocurrency and token projects tied to various products such as games, artwork and the metaverse. However, this new universe full of applications that simulate traditional banks or brokerages, but without intermediaries, the lay investor and even the most experienced are subject to falling for scams.

THE Bitcoin Portal shows in this article some well-known scams in the decentralized world of cryptocurrencies and brings expert tips that can help the new investor avoid the pitfalls.

First, however, let’s go to the concept of DeFi and the most popular types of scams in the crypto market.

What is DeFi

Unlike the traditional financial system, DeFis do not depend on brokers or banks, as they have a self-executing system that works through smart contracts on blockchain networks. These contracts, also called ‘protocols’, circulate on decentralized exchanges (DEX).

Among the most popular DEXs are Uniswap, Pancakeswap and Binance Smart Chain, which can be accessed, for example, as a Metamask wallet. But there are dozens of them.

Smart contracts are always tied to some crypto asset to obtain liquidity, usually through Ethereum and Binance coin funding, necessary for the product launch – which can be a metaverse ecosystem, for example. Therefore, if the project succeeds, the investor will profit from the increase in the price of the asset. Many projects have succeeded 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 Scams

  • The scammer steals all of DEX’s liquidity;
  • The protocol developer manipulates the “approve” function of the smart contract so that the cryptocurrency holder cannot sell;
  • The project’s creator robs the investor even before issuing an asset, after raising funds with an initial cryptocurrency offering (ICO);
  • The hacker exploits a flaw in the protocol and steals any funds it finds.

It is worth remembering that even good projects — including those endorsed by the crypto community and also by experts on the subject — can contain some flaws and open doubts to a scam. An example is the recent case of Terraforms, which left many experts with their jaws dropped, 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 that worked until a few days ago, when the entire ecosystem collapsed.

In DeFi, “the risk is all ours”

“[Eles] have social networks? Have the protocol creators been on other projects? The phrases are by Viviana Maria Schwengber, a trader at Mercado Bitcoin, who was contacted by the report to comment on the matter and give warning tips 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 Coingecko. In the case of a protocol, it is important to know who is behind its creation. “You can look it up on LinkedIn,” she 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 more, but we need to be careful,” said the trading specialist.

As everything is still in the beginning, there are some bugs that hackers can benefit from, such as, for example, in the decentralized loan modality, he explains. “Many users lost the cryptos they placed as collateral.”

Another point is about what was invested in the project. According to Schwengber, every project needs initial capital: “A good tip is to try to see if you already have a list of investors and who they are, and if the team doesn’t own much of the tokens. This is an important point, “because they can use these tokens both to consume and to manipulate the price”.

Schwengber concluded:

“This operation has no intermediary, so you will be exposing yourself to the decentralized world that is just beginning. That’s why the chances of profits are greater, as well as the risks. It is also no use trying to turn to the authorities of the traditional financial system afterwards, 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, a specialist in new businesses in the Bitcoin Market, who did not hesitate to quote the old maxim: “if it seems too good to be true, it is because probably not”.

He cited as an example a completely anonymous or very new project, which does not have a 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 help the protocol develop, who founded or released the initial code and you can’t find LinkedIn or Twitter, for example.”

Another thing, continued Pinsdorf, is the many “win with this protocol” incentives. According to him, this usually has some criticisms. “For example, the guy just released the protocol and he says ‘60,000% a day’. So you question how sustainable this is and how much sense it makes for something that should be solid at the end of the day. So it could be a scam, because scams have all these things,” said the expert. And added:

“If have [indícios]it’s usually good to get smarter, more cautious, always go into social media because sometimes there are already people who are there complaining [do protocolo]: ‘I deposited here, where is my fund’”.

Pinsdorf also suggests looking to see if any recognized security company in the market has already audited the smart contract. However, he explained, “as much as you have these companies doing [a auditoria] It’s not risk-free either, but it improves a lot — because you reduce a lot of the known attack vector.”

Pinsdorf also suggests that, when in doubt, the investor who wants to make an exchange, should look for DeFis that have been on the market for a few years, such as Waves and Compound.

“It doesn’t exempt either, but the risk is much lower… And it leaves to venture into more experimental protocols when you understand a little more about what is or isn’t something reliable”, he concluded.

Rug Pull Scams in DeFi Protocols

The acceleration of the DeFi sector, stemming from the hype of NFTs (Non-Fungible Tokens) games, has become a perfect space for scammers to exploit investors’ lack of knowledge. One of the most applied blows lately became known worldwide as Rug Pull (or rug pull, in Portuguese).

The rug pull scam is nothing more than the abandonment of a project by its creator after having raised funds from investors. The phenomenon, however, is just one strand of other known scams, but with a new bait, cryptocurrencies.

One of the best known cases was that of the cryptocurrency meme Squid Game (SQUID), which took place after the hype of the Netflix series ‘Round 6’, released in September 2021.

The SQUID token appeared out of nowhere on October 26 at $0.02, reached $90 in the early hours of November 1, and dropped to zero four hours later. That is, in less than a week the rug-pulling plan was executed.

Another famous case is that of OneCoin, a currency that never existed – that is, the project never got off the ground. And the creator of the scam, the Bulgarian Ruja Ignatova, ‘took home’ US$ 5 billion from investors and to this day it has not been found.

Thodex, it was another. In 2021, in Turkey, a rug pull of 356 million Turkish Lira (about US$24 million) was applied through the cryptocurrency exchange. Earlier that year, the company’s website went down and its founder disappeared, becoming part of Interpol’s red broadcast.

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