The Cryptocurrency space has been rife with scams and thefts with a lot of DeFi scams happening on a daily basis.
These DeFi scams have taken over the Cryptocurrency space with Cryptocurrency scams ripping off over $14 billion worth of Crypto from investors in 2021.
These Rug pulls, ICO scams, Honeypots and other forms of DeFi scams have sparked debates among Cryptocurrency investors and experts on whether regulation is the solution to Cryptocurrency scams. Due to the fact that Cryptocurrency investors currently do not have any form of protection, as there is no Legal framework that ensures the safety of their digital assets.
However, the questions remain. Will Cryptocurrency regulation put an end to Cryptocurrency scams? Is there a possibility for an Internationally coordinated regulation that protects Crypto users all over the world?
Or Crypto regulation itself will create a new problem for Investors. These and many more questions will be answered in this analysis of DeFi scams and Cryptocurrency regulation.
Table Of Contents
- DeFi Scams Explained
- Rug pulls
- Presale Scams
- Fraudulent And Malicious Smart Contracts
- Phishing (Fake Airdrops)
- Is Crypto Regulation The Solution To DeFi Scams?
DeFi Scams Explained
All DeFi scams have one thing in common; using Decentralized Finance (DeFi) to take advantage and exploit their hapless victims, robbing them of their Cryptocurrency assets and investments.
To make matters worse, The structures and features of decentralized finance allows these scammers to manipulate the system. As a result of DeFi’s decentralization, anonymity, privacy and permissionless features which protects the fraudulent developers as there is no intermediary or centralized authority to protect the interests of Crypto investors, monitor the execution of transactions, identify erring users or punish scammers trying to defraud investors.
These and some other challenges that the DeFi space currently faces, have led to the rise of different types of DeFi scams and thefts.
Here are some of the most rampant Cryptocurrency scams on DeFi protocols.
There’s no denying it, if you’ve actively bought Coins on Decentralized exchanges (DEX) with the hope of mooning overnight you’ve probably been rugged before.
Currently, more than 80% of Cryptocurrency projects are scam and Rug pulls account for more than 75% of these DeFi thefts.
Rug pulls happen when crypto developers abandon their Cryptocurrency project and disappear with investors’ funds.
Rug pulls come in two major formats, Liquidity pulls and Dumping.
Liquidity pulls involve developers selling off the coins in the Liquidity pool thereby draining the coin of its value while the fraudulent developers walk away with millions of dollars.
In Liquidity pull scams, Investors are left with worthless coins as there’s no Liquidity to sell or are forced to sell their bags at ridiculously low prices.
To protect yourself from being victim of a Liquidity pull, ensure that Liquidity is locked and check the duration for which it’s locked, once Liquidity pool tokens are locked, developers can’t pull the LP tokens and run away with investors funds.
Dumping occurs when developers sell off their own Coins (In this case a huge percentage of the Coin’s total supply) after a huge spike in the price of the Coin, causing the price of the coin to reduce drastically.
This type of Rug pull is also known as a pump-and-dump, Considering that the developers create hype around the project by promoting the coin through celebrities, Influencers and other social media methods before dumping their own tokens on Investors.
To prevent a Dumping scheme from exploiting you, check if a wallet holds a huge percentage of the Coin’s supply. If a single wallet holds more than 5% of the supply or the top 10 wallets hold more than 20% of the supply then it’s a Dumping scam.
As if these top wallets sell off their coins, the price of the Coin will crash.
Also Read: What Is DeFi Yield Farming?: A Guide To Cryptocurrency Passive Income
Honeypot DeFi scams occur when investors buy a token but later discover they’re unable to sell their tokens. The scammers can create an illusion that investors can sell their tokens. By setting up the smart contract in a way that allows a few wallets controlled by the scammers to sell their tokens.
The scammers can use these wallets to repeatedly buy and sell the token so investors can think they can sell their tokens if they buy.
To detect a Honeypot scam, check the tokens contract and make sure that it’s not only a few addresses that are repeatedly selling or there’s only buys with no record of sales.
However, the most important way to detect Honeypot scams is to check the tokens contract on Honeypot detection softwares like honeypot.is, rugdoc.io and detecthoneypot.com.
Presales along with ICOs, IDOs and IEOs act as a crowdfunding method for developers to raise funds for their Cryptocurrency projects by offering investors the incentive of buying the project’s coin at a significantly less rate than the predicted launching price.
However, scammers can also launch a Presale with the sole objective of getting unsuspecting investors to invest their Crypto assets in the project, after which they would abandon the project and make away with the funds invested by investors who bought their Presale tokens.
These Presale, ICO and other Crypto crowdfunding thefts are not difficult to figure out, if you have the right knowledge of blockchain technology and the Cryptocurrency space.
Here are ways to detect a Presale scam.
1. Do Proper Research On The Project’s Team
Don’t let anyone deceive you with a “Satoshi Nakamoto” anonymity parade. With the spike in the number of Crypto projects launched by scammers, it is important that Devs show their identity to Investors so that investors can check their past record in the DeFi space.
Make sure you do your research on the team behind the Crypto project you want to invest in their Presale.
Check their Social media accounts and make sure their Social media presence isn’t dodgy.
2. Analyze The Project’s Whitepaper
The project’s Whitepaper contains every information about the project, the roadmap, what they’re looking to achieve with the project and how long it will take to reach certain goals of the project.
An investor needs to thoroughly peruse the project’s Whitepaper and check the feasibility of the project before investing. A project that doesn’t have a Whitepaper is 99.9% going to scam Presale investors. And if a Whitepaper seems too fake to be true investors should avoid it.
Scammers lack the time to thoroughly outline the project’s goals and how they’re looking to implement them or are promising too much within a short period of time.
3. Verify Project’s Credibility
Here’s the stage where an investor has to be very critical of the project.
Check the project’s official website and social media pages and look out for any red flags or anything suspicious that you might need to look into. Find out if some Users lay complaints, raise red flags about certain issues or ask questions about the legitimacy of the project.
In addition, If the Devs tell you that Presale tokens won’t be released to Investors immediately after launch, that Presale investors will have to wait for months before they get their Presale tokens then the project is a Scam.
Fraudulent & Malicious Smart contracts
The smart contracts of some Coins are designed in a way that creates a backdoor for the Developers to steal funds from the project.
These category of DeFi scams come in different methods and can easily be spotted if an Investor diligently does his research.
To illustrate, a quick scan of a coin’s contract address on Token sniffer will reveal all the information about the coin’s smart contract. It can state whether the coin is a honeypot, if there are signs of a rug pull scheme and if Liquidity is locked.
However, some fraudulent features to watch out for are.
1. Owner can mint new tokens: In this case, if the Developers mint new tokens, they can dump the new tokens (As they get to decide how many percent goes to them) on the market and thereby cause a huge dump in price.
2. Ownership of the smart contract isn’t renounced: This means the Developers can modify contract behavior. For example, they can; disable selling, increase fees (Slippage) or mint new tokens.
To avoid falling victim to a smart contract that Devs can manipulate, make sure you do thorough research before investing and use smart contract analysis softwares such as bsccheck and A block explorer
Phishing Tokens (Fake Airdrops)
If you’ve ever received an Airdrop that is worth tens of thousands of dollars without even applying for an airdrop then chances are you’ve just received a phishing token.
These fake airdrops are designed to lure Cryptocurrency users to visit phishing sites or attempt to trade the token on a decentralized exchange (DEX).
Once the victim approves the token or grants the site permission to his wallet then the scammers can steal the Crypto assets in his wallet.
To avoid falling victim to a Phishing scam, you should do research on any free token you receive and confirm if the project is legit.
In addition, avoid selling a Phishing token (The transaction will fail and the scammers will gain access to your wallet and drain it), don’t grant a site you don’t trust permission to your wallet or connect your wallet to a Phishing site.
Is Crypto Regulation The Solution To DeFi Scams?
While DeFi scams have been on an upward trajectory in recent years, Crypto regulation has been touted by many as the solution to DeFi scams. However, will regulation actually solve the problem? considering the structure of DeFi and Cryptocurrency as a whole and the dependence on decentralization.
It’s undeniable that Cryptocurrency regulation can benefit DeFi positively in multiple ways it can bring in more investors to the DeFi ecosystem, increase the value of Cryptocurrency, increase market stability, prevent fraudulent activity within the Cryptocurrency ecosystem, provide framework and rules by which DeFi protocols will operate in the Crypto space and most importantly (speculatively) protect investors from DeFi scams and thefts.
Despite these benefits of Crypto regulation, there’s a 99.9% chance that Crypto regulation in DeFi isn’t feasible.
Unlike traditional financial setups that include an intermediary and peer-to-peer execution of transactions, DeFi protocols are out of the reach of regulation as users anonymously interact with the DeFi protocols via smart contracts with the use of just their Crypto wallets.
This means that Developers can launch their DeFi projects anonymously, as everyone is allowed to interact with DeFi protocols without revealing their identity.
Therefore the features of Decentralization, Anonymity and privacy makes it extremely difficult to regulate DeFi ecosystems.
Another challenge of Crypto regulation is that most attempts to regulate Cryptocurrency come from the USA and some other European countries. Which means that Crypto regulation on a global scale is a myth.
For crypto investors, avoiding DeFi scams depends on your knowledge of DeFi ecosystems and how the different protocols operate.
Every project that a Crypto investor puts money into should be thoroughly scrutinized before investing by using the appropriate softwares to fish out scammers.
In addition, Investors should also avoid investing in shady projects all in the name of taking risks.
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