As the cryptocurrency space is witnessing rapid growth disrupting various sectors, decentralized finance (DeFi) platforms have also displayed rapid growth. From $275M locked up in the DeFi sector in early 2019 to a whopping $8.9 billion or more currently, the DeFi ecosystem is turning heads. The influx of DeFi protocols leveraging the Ethereum network has brought with it massive challenges. Apart from driving transaction costs (gas fees) on the Ethereum network to record highs, the DeFi hype has led to increased scam tokens swindling unsuspected users.
Scams currently seen in DeFi take a similar approach as the Initial Coin Offering (ICO) experienced during 2017's legendary bull run. ICO scams involved projects writing a whitepaper detailing how their crypto was going to transform the world, hype it up across various media, conduct a token sale, make millions, and then exit the market leaving investors counting heavy losses.
So much has DeFi scams become prevalent in the crypto space that CryptoWhale warned its followers that 99.99% of DeFi tokens are scams designed to steal their wealth. On September 10th this year, a new liquidity mining pool DeFi project- Yfdexf. Finance scammed investors $20 million in total funds locked in its protocol. Another DeFi coin Hotdog went from virtually nothing to over $5 000, stayed relatively stable for a few hours, and then crashed down below $1 in just five minutes.
As DeFi scams are becoming more apparent, there are ways you can protect yourself from DeFi scams, as discussed in this article.
Types of DeFi Scams
DeFi scams, like all other crypto scams, take different forms as below.
Exit Scams
Exit scams are perhaps one of the most widespread forms of DeFi scams. This type of fraud involves fraudulent DeFi platforms launching their project, creating a hype using media, and vanishing with the total funds locked in the protocol. Due to the decentralized, anonymous, and regulation-free operations of the crypto space, it's quite challenging to trace DeFi scammers. To avoid exit scams, crypto investors need to first assess the crypto project's viability by verifying the credentials of the crypto team, analyzing the documentation, and looking at the bare-bones working model. Heavily promoted DeFi protocols or projects with extravagant returns are often caught up in exit scams. In 2019 alone, exit scams swindled $3.1 billion from crypto investors.
Pump and Dump Coins
Pump and dump schemes are one of the biggest scams in the cryptocurrency industry. The Crypto pump and dump scheme is similar to the equity markets pump and dump scheme, which involves a small group of investors selecting and purchasing shares in a company with a low market capitalization, causing an initial jump in price. After a price hike, a hype is created around the company to convince potential private investors to purchase the stock, thinking that it will experience substantial gains.
Once enough investors have been misled into purchasing the stocks, and the price has risen enough, the initial group of investors sells their shares to profit. What follows is a price collapse causing all following investors to record hefty losses.
Just recently, Sushiswap platform found itself in a pump and dump situation. The anonymous developer, Chef Nomi, was rumoured to have swapped all Sushi tokens to ETH. However, Chef stepped in to defend himself claiming that he deserves the ETH based on his commitment to the Sushi community.
Dodgecoin also got the same hype whereby a TikTok user named James Galante urged his followers to buy Dodgecoins. According to James, Dodgecoin had no value so if the 800million users bought the coin, it would reach a dollar. During the whole pump incident, Dodgecoin trading volumes shot up immensely by 1000%.
Pump and dump schemes involving DeFi tokens have become prevalent, defrauding investors millions of dollars. Usually, few DeFi tokens would be airdropped to some of the influencers who promote it to unsuspecting followers on Twitter. One the DeFi project gains traction, organizers of the pump and dump scheme sell airdropped tokens to DeFi investors, making lucrative profits.
The easiest way to identify a pump and dump scheme is when a new DeFi token suddenly rises substantially without a plausible explanation. A sudden spike in price can quickly be established on a coin's price chart. A 5% price increase in less than five minutes is an indicator of a possible pump and dump schemes. Also, paid-for news articles about a new coin appearing in several crypto news platforms and social media could indicate a pump and dump scheme.
Uniswap Scam Coins
The liquidity protocol has also seen its fair share of scams. Creating a scam coin starts by manipulating another acknowledged token based on the Uniswap platform. Therefore, making it easy to deceive users into exchanging their assets for a worthless token. Any user can paste the address of the intended coin to be listed onto the Uniswap menu.
Yield farming emerged to become one of the most effective ways to earn in the DeFi space. Nonetheless, despite the potential of achieving a substantial income, innocent investors like Jhon Doe lost their tokens in an organized duping activity.
Jhon lost $140 worth of tokens when trying to farm some MEOW tokens on UniCats. Furthermore, Jhon agreed to was corrupted; hence, the scammer successfully ran off with thousands of money. Since Uniswap doesn't have an appropriate procedure for listing tokens, it can be challenging to differentiate a scam coin from a genuine one.
However, some platforms are quick to notice the new tokens that are not related to them. Balancer, for instance, took to twitter expressing how the BAL token on Uniswap is a scam because it's not their project. Curve Finance followed suit, urging its users that they haven't released any token yet.
In a bid to curb the scam coins issues, Uniswap designed a Telegram bot that gives up to date listings on the platform.
Admin Imitator
This type of DeFi scam usually occurs on social media platforms like Twitter, Telegram, and Discord. Usually, the scammer may pretend to be from the DeFi platform support team and uses similar usernames or the same image as the platform's admin. The fake admin may ask users to send ETH to a particular address to resolve an issue or may ask users for their private keys with the excuse of a quicker resolution.
To protect yourself from this form of DeFi scam, always ensure that you verify the platform's admin's usernames. Most DeFi platforms admins never ask for private keys or ask you to send money to resolve issues.
Discord Bot Scam
Discord Bot Scam is a relatively new type of DeFi scam on Discord where a Bot representative of a DeFi platform may announce updates, fixes, and special features via a link. The link redirects users to a potentially compromised version of the platform, thereby causing a phishing attack.
To protect yourself from discord bot scam, avoid clicking unrecognized links and verify the message for any inconsistencies or errors.
Fake Airdrops or Giveaways
Most DeFi protocols start by offering airdrops and giveaways to their followers to raise awareness of the platform and scale their community. In certain circumstances, scammers may infiltrate the system and provide fake airdrops and giveaways to scamming unsuspecting users. You can protect yourself from this type of DeFi scam to avoid sharing your private keys and other personal information to third parties.
Keeping Ethereum Anonymous- Best Way of Avoiding DeFi Scams
Privacy has been a real concern for crypto users. While Ethereum and Bitcoin claim to be completely anonymous, they can still be traced. Keeping Ethereum safe and out of scammers and hackers' eyes is the best way to avoid DeFi scams. BitcoinMix.org offers a unique solution of keeping Ethereum anonymous in line with Satoshi Nakamoto's vision for cryptocurrencies. BitcoinMix.org offers outstanding Ethereum anonymity thanks to its outstanding features, including enhanced security, full-proof algorithm, automated mixing, and full users' anonymity. Additionally, the Bitcoin mix platform does not store any transaction information taking place between the sender and the receiver.
Conclusion
Indeed, DeFi as a whole has been a hot topic over the last year: exchanges, loan platforms, other projects that act as autonomous hubs that users can use to access a variety of financial services without having to rely on a third party
However, the rapid rise in DeFi platforms has created an increase in scams that have conned investors millions of dollars. Bitcoinmix.org is an efficient way of achieving Ethereum anonymity and avoiding DeFi scams. Read the full Bitcoinmix.org review to find out more about how you can use the platform to keep Ethereum safe and out of the eyes of scammers and hackers.
