In the world of cryptocurrencies, scams are unfortunately too common. For anyone who wants to be involved in the world of decentralized finances, it is important to know how DeFi scams operate, and how to protect yourself.
What are DeFi scams, and how do they work?
Decentralized Finance (DeFi) is the shift from centralized financial system to peer-to-peer finance enabled by decentralized technologies, built on the Ethereum blockchain.
This shift promises an equal and accessible financial system. Of course, this has many benefits, but also many disadvantages, and one of them is that it is still largely unregulated.
As you might guess, the lack of regulation makes DeFi a haven for fraudsters.
The typical DeFi scam usually involves three steps:
Step one - The scammer creates a fake project, or makes a copy of an existing one
Step two - The scammer promotes his project to attract users
Step three - The scammer exits the scam, leaving users with no access to their investments.
The most common DeFi Scams
There are many different types of scams in the DeFi space, but here are some of the most common ones:
Phishing scams
One of the most common types of phishing scams in the DeFi space is impersonation. Scammers create a fake project, copying a legitimate one. This way, they trick users into sending them money or personal data. Ponzi schemes are another popular type of scams, where fraudsters use the money of investors to pay out previous investors.
Using fake or stolen identities
Another common scam in the DeFi space is identity theft. Scammers use stolen data to register a new account or access an existing one. This information can also be used for accessing private keys or recovery phrases.
Pump and Dump
This is also a popular scheme, where a group conspires to acquire a cryptocurrency at the same time to drive up its price. After that, the group sells it at the peak price, after promising a group of traders that this will not happen.
As you might guess, pumpers make a profit, while dumpers lose their investment.
Fake digital assets
Unfortunately, there are many fake DeFi projects that don’t exist, but manage to attract investors, as they look legitimate or copy an existing project.
How to protect yourself
As we already explained, scams exist in the DeFi world, and we don’t expect it to change anytime soon. So at this point, the best you can do is protect yourself from falling into one of these scams.
Do proper research
This is the best you can do, before making an investment. Read up as much as possible about the given project. Look at their background, and find information in credible sources.
Invest as much as you are willing to lose
This is the most common advice you will hear in the crypto space, and it is essential in the DeFi world. Crypto projects are very new, and volatile, and there is a lot of uncertainty surrounding them. This is why you should not invest more than you are ready to lose.
Invest in projects with audit certifications
Invest in a project that has gone through an audit and has passed a vetting procedure, as this adds an extra security layer.
Verify senders and receivers before transferring funds
It is important to verify both the sender’s and receiver’s addresses, as many people have fallen victim to scams where they didn’t confirm the address before sending their funds.
Conclusion
One of the best ways to protect yourself is to stay aware of different types of scams, and best security practices in the crypto world. Understanding how scams work will help you protect yourself from falling into them.