DeFi Crypto Scams On The Rise – How To Protect Yourself

However, with the increase in the market cap of DeFi protocols, so also the rise in scams in the sector. This piece looks at the various DeFi scams and how investors can protect themselves.

Types of DeFi scams

The various types of DeFi scams are outlined below.

Rug Pull or Pump-and-Dump

This is a situation whereby the developers of a project pack up and run away with the funds of the investors. They start by making false statements and promises about a coin’s revolutionary use case. They promote the coin and generate hype around it. This causes the price of the token to skyrocket.

Once the coin has enough liquidity and investors, the scammers sell their coin holdings, causing the price to dip. The rest of the investors are left holding tokens that are worth just a tiny fraction of their initial investment.

Honeypot

This is similar to the pump and dump in that they lure investors in with incredible hype, big-budget marketing and lofty price projections. As investors enter the market and the price starts to rise, people will want to start taking profits.

However, this is when you will be unable to withdraw your money. When you try to withdraw, you will get error messages like “the transaction cannot succeed due to error: undefined. This is probably an issue with one of the tokens you are swapping.”

At this stage, the scammers have run away with your money, and you cannot be able to withdraw the profits or your initial capital. Only the developers get to sell their tokens, while the investors can only watch the value of their tokens.

Wallet Dusting

This is popular for users who use wallets such as Trust Wallet or MetaMask. The scammers deposit a minuscule amount of an obscure coin into your wallet. Any attempt to try and withdraw the coins will give the scammers access to your wallet, and they will withdraw everything you hold. Hence, ensure you don’t try and sell any coin you didn’t buy.

Phishing

Here, the hackers trick you into handing over sensitive information like usernames, passwords, credit card numbers, and even social insurance numbers. With this information, they can impersonate you and gain access to your cryptocurrency accounts. They can proceed to clear out your crypto holdings. Phishing is quite popular within the cryptocurrency space.

How to Avoid These Scams?

Now that you know about some of the popular DeFi scams, the question is, how can you protect yourself from them? Here are some of the things you can do to ensure you don’t fall victim to a DeFi scam.

Research Properly

The most important thing before investing is to do your research. Find out the team behind a project and what they intend to do. Look for the LinkedIn profiles of the team members, as this allows you to easily see the history of the accounts. Furthermore, check the roadmap of the DeFi project before you invest in them. This will allow you to determine if they have a viable use case or not.

Check Authenticity of Smart Contracts

Always check the authenticity of the smart contracts. Once you find the smart contracts, proceed to look at the team behind them before making any investment decision. The anonymous team with the private smart contracts is usually a red flag.

Initial Market Capitalization

Take a look at the initial market cap of the token. It is a red flag if the team doesn’t make the token distribution chart public and if they possess a significant portion of the tokens.

Look for Early Investors

There are some popular investors within the cryptocurrency space. Ensure you look at the early investors of a DeFi project to see if there are trusted names there. Seeing trusted names amongst the investors shows that a project has promise.

Always ensure that you carefully check the links in your emails before visiting them. This will save you from phishing attacks. Ask yourself if the message in the mail makes sense or if you have no recollection of what the content is about.

Enable Extra Security Measures

To ensure extra security, enable 2-step verifications that can email or text codes to your inbox or phone when logging into your wallet or executing a transaction. If you trade via your phone apps, enable biometrics that use your fingerprint to launch the apps. You can also add a custom anti-phishing code to your crypto accounts if available.

Get a Cold Wallet

If you are not a trader, it is advisable to get a cold storage wallet like Ledger or Trezor. These are devices that store your coins and tokens offline, making it virtually impossible for hackers to gain access to your crypto holdings. We recommend buying the cold storage wallet directly from their sites instead of retailers like Amazon or eBay.

Know When to Quit

Finally, know when to quit. DeFi investment can be like gambling at times. If you are recording losses all the time, then it might be time to quit and walk away. Don’t lose your life savings chasing gains and false promises.

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