How to Spot Scams in DeFi Projects

A guide on how to protect your investment by identifying scam projects in decentralized finance (DeFi) space.

 

The DeFi space is growing at a high rate. The Total Value Locked (TVL) grew by 14 times in 2020 and in 2021, doubled in valuation to an estimated $37 billion.

How to Spot Scams in DeFi Projects?

How to Spot Scams in DeFi Project

There are hundreds of thousands of DeFi projects hosted on different blockchains across the world. However, not all of these projects are 100% trustworthy. The growth of the DeFi sector has attracted the attention of scammers and bad actors. This article details how to spot scams in this space.

What are the Main Objectives?

What are the primary objectives of the projects? Evaluate those objectives and the underlying vision behind the decentralized finance (DeFi) platform. Find out whether they make sense or not. The vision and objectives of the project must align with your investment goals. Once you have this in mind, find out the roadmap of the team on how it intends to achieve those goals. However, do not dismiss all DeFi projects as shady businesses.

When evaluating these projects identify credible sources and establish the credibility of a project. Read their whitepaper, visit their social media pages and go through their blog articles. The co-founders could be a team of people experienced in leading blockchain or IT projects or established entrepreneurs who’ve already had a track record in deploying DeFi businesses. Utilize such benchmarks to narrow down your whitelist and keep those projects that seem credible and trustworthy.

Development

Evaluate the level of participation by developers on the project. Is the code open source? You will find out the majority of decentralized projects are driven by open-source principles. A good project is bound to attract a high number of users who will undoubtedly review its source code. Where this is the case, the developers are likely to post any malicious code activity on forums related to the project. You can analyze the code yourself if you’re tech-savvy. Besides, best development practices will involve constant code improvement and security implementations.

Smart Contracts Audit

Smart contract audits seek to evaluate and challenge a contract’s code in different ways to establish its technical strength, operational efficiency, security risks, and best use cases. Much of smart contract audits involve simulated penetration testing and attacks. The auditing firm ensures the DeFi projects are healthy for investors and secure enough to hold their funds.

Note that while it is usually a good practice to undergo a smart contract audit, not all DeFi projects choose to. Also while audits are important benchmarks for ensuring quality delivery, they are not necessarily the final guarantee of safety.

The Team Behind the Project

What is the experience of the team behind the project in the decentralized space? Do they have a relevant track record? Do they know the blockchain space and have they deployed other projects in the past? Also, find out whether they are known or unanimous. Founders behind most projects in the blockchain space are anonymous. There are high chances of getting swindled by projects without an accountable known team. Since who will you hold liable for the funds if the project acts scammy?

Tokenomics (Issuance)

Tokenomics is how digital currencies work in the broader blockchain ecosystem and involves token distribution and community incentives. Put tokenomics into consideration when establishing the credibility of a DeFi project. Study the platform’s roadmap and how the team will distribute the tokens into circulation. Fraudulent teams are known to inflate token prices and then oversupply the market with the tokens.

Furthermore, study the liquidity plan of the platform. Whether through liquidity mining or yield farming. The idea behind DeFi projects is for users to lock the decentralized token and obtain incentives in the form of newly minted tokens. An example of a shady DeFi project is one that takes the locked funds from users.

Additionally, take a note of the initial distribution plan? Has the team publicized the token sale on social media? The project could also issue the tokens through an airdrop. But the disadvantage of airdrops is increasing selling pressure.

Closing Remarks

Good DeFi projects have a well-laid-out plan on their whitepaper and roadmap. The project ensures it remains engaging to the consumers through its FAQ, blog posts, and social media pages. Additionally, the project has in place a responsive support team that is live 24/7. Put these guidelines into constant use and you will never fall for malicious projects.


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