Cryptocurrency scams are ruining the enthusiasm for decentralized finance.
Crypto enthusiasts claim that decentralized finance represents a revolutionary next step in terms of finance. This new space can offer its users the ability to potentially make money while contributing to something larger than life-a-community run purpose.
The downfall of DeFi is that this innovative technology comes with some drawbacks. The cryptocurrency industry has been full of scams, Bitcoin (BTC) fraud, blockchain scams and other wallet-threatening scenarios. In 2021 alone, cryptocurrency scammers and thieves in the DeFi sector stole over $12 billion worth of crypto assets from user wallets as well as exchange holdings. Partially due to poorly programmed smart contracts or security flaws on the platform side but also because there are bad actors out there taking advantage of people who are new to these types of investments by running fraudulent schemes like ICOs where they steal money before disappearing without a trace after collecting funds for their scam schemes through cryptocurrencies which falls prey to strict regulations that don't exist yet in most jurisdictions. While it may take a while before we see an end to blockchain scam tactics within the market space until then this guide intends to educate users on how these digital currency scams work and what you need to watch out for when coming across one!
How DeFi makes traditional finance better
The security and accessibility upgrades that come with a decentralized finance network are evident to crypto enthusiasts. These benefits can be brought forth by decentralization, despite the current cryptocurrency scams and attacks we all see happening on the financial market.
Data security is one of the most important aspects in finance. The server acts as a central point for clients to connect and submit information, like passwords or bank account details. This makes them easy targets for hackers who then have access to valuable data about their client's accounts which could lead to financial loss if not protected properly! Unlike traditional finance platforms, cryptocurrency has no servers so there are no centralized points of contact that can be hacked into by thieves- meaning they cannot access personal information like passwords or addresses without actually stealing crypto coins themselves first.
With decentralization, all the nodes are connected to distribute contact points across the world. This is better than having a central point of attack. After all, it's so hard for someone who would need to take control of 51% of these nodes - which isn't impossible but very unlikely because there are many more competitors out there. Also, decentralized networks have more security as compared with centralized ones due to this distributed nature.
Nodes provide access to the network in a decentralised manner, distributed worldwide. Anyone can connect and use whichever decentralized network they choose. When connected, users can send funds or interact with the network in other ways without barriers that exist in traditional finance.
For example, you can send funds to a family member globally quickly and easily. There are no hidden costs or fees associated with this transaction because there is almost zero wait time. Additionally, there's no centralized entity that might block your transactions for strange reasons like excessive fees or unanticipated waiting times.
DeFi networks are changed by the users, not just one central entity like traditional banks. Users must propose and vote on a change to implement it, so they can keep control of their finances. If there is ever an anomaly with transactions or other suspicious activity, the community votes on whether that transaction should remain in effect or be reversed. DeFi’s decentralized infrastructure presents users with more authority over finances than before!
While there are benefits to come with the power that DeFi offers, this is not true for every platform. For example, as well as many of the issues mentioned above there can also be fraud and human error on these platforms. One must be mindful of how they use their power and take responsibility for its intentions to not run into any problems like this.
How hackers commit their crypto scams
For many, using a decentralized or blockchain-based mechanism for governance is appealing in its own right. It’s easy to understand why people might be tired of centralized entities telling them what to do and controlling their lives. The entire purpose behind DeFi is empowering the users - empowering individuals across borders who will have access to resources, but responsibility rests with those that use it. If this doesn't happen as intended though? Then the consequences can be dire.
Humans are building decentralized finance platforms with the help of programmers. These platforms offer various actions and capabilities for users to choose from, with human input. But humans make mistakes when programming them- where the exploits come in is that they can be taken advantage of by malicious parties.
In the world of Decentralized Finance, projects appear left and right. Being first to market is vital to success in this space and you need a highly-skilled team if you want your project to succeed. As blockchain networks are entirely open source, those with evil intent can find vulnerabilities in any project that’s not doing everything it needs for safety (such as security). They will use these vulnerabilities - which could mean theft or abuse - against unsuspecting victims on the platform itself.
The process of auditing a project's code with a third-party, though more expensive than simply developing the product and launching it without one, is useful to ensure that things are in good working order. However, many blockchain projects struggle to find funding just for basic development. And while they wait around for an audit opportunity to take place - which can be difficult because of time constraints or lack thereof - the incomplete products aren't operational just yet; therefore, these projects may move ahead without any kind of review process on their code at all.
Despite the conventional code and servers which have been relied upon for decades, traditional platforms are not immune to human error or attacks either. This is because they follow tried and true security methods with decades of testing in the field. In contrast, blockchain-based platforms don't have that luxury - meaning errors can sprout up without warning while developers scramble to find a solution when building smart contracts for those particular blockchains.
There is a problem of ambition. Some projects are simple token swap platforms, which enables users to switch from one token to another with ease. Others are looking to use blockchain technology as an opportunity for the world in which we live by providing new ways and experiences such as traditional applications and services on their platform through smart contracts that interact with other smart contracts among other functions so more errors could be found due to the broadness of what they intend on doing.
Centralization is a risk that results in similar risks to traditional finance platforms existing on conventional servers despite promising the opposite. Trust and accountability are always important when it comes to financial transactions, but they become incredibly more important with decentralized projects as you have no centralized point of failure. Bad actors would likely be able to attack these less-centralized platforms easier than central ones because there is no singular point of failure for them.
How to recognize crypto scams, DeFi scams and how to avoid them?
The following are scams that are part of the crypto industry and should be noted by all DeFi traders:
- Honeypot
- Rug Pull
- Social Media Scams
- Phishing Scams
A Crypto Honeypot
Honeypot is a smart contract that appears to have a design issue. When the user sends an arbitrary amount of Ether, they get their money back by opening up this trap door to steal coins from unsuspecting individuals who decide to use it. However, when someone tries and fails at exploiting the apparent flaw in which another individual stole crypto-coins from them before, then yet another trap door opens up for no one else but themselves. The only way to avoid honeypots is to use some token scanner like Tokenspector Smart Contract Scanner. It shows the current status of the smart contract and potentional threats. But, unfortunately, there is no 100% guarantee that the contract will not become a honeypot in future (if there is a hidden functionality exist).
A Rug Pull
In the DeFi space, rug pulls are typically one of the easier scams to spot. They're extremely simple and often use high-pressure sales tactics to entice people into buying cryptocurrencies that look like a good deal but ultimately fail in deliver due to low liquidity or lack of innovation.
Developers who create a project, promote it as an exciting revolutionary one. They gain support and gather hundreds of thousands or even millions of dollars in investment from investors.
Then one day these developers sold the tokens and disappeared with the funds. These developers never intended to at least build a project they promised on time, in full or even use investor's money for their gain. Instead, they simply wanted to conduct a scam on all of those investors who believed them by selling off their tokens right before launch without any intention of building what was promised earlier.
It can be easy to spot a scam project if you pay attention to the developer’s relationship with their community, and how they plan on distributing their tokens. If there is no lock-up period of the developers' tokens, then these teams have full freedom come what may.
Token lock-up periods are a great way to make sure developers don't dump money raised. One example of this is the fact that projects like Golem and MakerDAO have detailed token lock-up periods, which will ensure investors won't lose their investment. They also provide consistent updates about what's going on in their network as well as being open with the community for long term planning purposes. These types of projects typically involve pump and dumps - where someone or some group runs off with all funds through deceptive means such as deception - but they're not exclusive to DeFi.
When a project is found to be "unruggable," it means that the development team has not contributed many tokens. The term typically refers to token-based projects where there are few or no significant tokens left in possession of the team, which can be taken as a rug pull or exit scam.
Another approach a team could consider for an unruggable project is if the team gives up any tokens, such as those obtained during a presale.
Social media scams
There are a lot of fake social media accounts impersonating various celebrities on Twitter or Instagram. These imposters might reach out to crypto enthusiasts and start promoting their new project with giveaways and competitions for being the first at an email address or sending funds to a specific account.
One way to check if a Twitter account is legitimate or not is through the follower levels. If an Instagram account has few followers compared to the actual celebrity's amount of followers, that could be a sign it's fake- for example, if there are millions of likes on their post versus only ten thousand likes on the real person’s posts. Another way would be by simply looking at its grammatical mistakes and misspellings- these accounts often have basic errors like this instead of more complicated ones which can be easily seen as mistakes.
Phishing scams
Phishing is a scam tactic as old as the internet. One way scammers attempt to trick you into giving up your personal information is by pretending to be legitimate companies and gathering it for themselves.
DeFi phishing is usually conducted via email, with a bad actor pretending to be an employee from a trading platform or protocol. A scammer will often make up some sort of error such as "your account has been compromised", and ask for wallet addresses and passwords, or demand that the victim send over funds.
Phishing emails might link to fake websites similar to an existing platform, enticing victims with the promise of their personal and private information. Only for that information be stolen by scammers.
To avoid phishing scams, one should always check the contact’s email address carefully. Often, the emails are full of random characters instead of an actual website name to make them seem more legitimate and trustworthy than they are. Otherwise, never click on a link in suspicious looking emails or blindly download software from these sites without checking for any security vulnerabilities first by navigating to the site manually and double-checking URLs with https certificate security certificates. For example, ensuring that all URL's have an https safety certificate installed as well as being spelled correctly.
What basic security measures you can follow to?
It is important to keep an eye out for the sorts of scams and frauds that occur within cryptocurrency, but there are also a few more generalized methods to help you stay off a scammer list.
Use Two-factor authentication (2FA)
All platforms should have 2FA to help prevent unauthorized access. It's a security method, that sends text or email after one inputs their password. This way even if a bad actor gains access to your account, they will need your cell number or email address for them to break into it!
Use a hardware wallet
Hardware wallets are external devices in which users can store their private keys. As the DeFi space develops, more decentralized applications (DApps) compatible with hardware wallets have emerged, meaning that users can securely store their assets while still easily accessing different platforms of choice.
Storing your assets in an online wallet is a risk. Even if you use a platform that keeps users' funds safe, they're still not as secure as when the access to these funds is kept offline. The best way to mitigate this risk would be by not holding any of your cryptocurrency anywhere but on hardware wallets with private keys which are only stored locally.
Learn more about a community and developers
Successful decentralized finance projects often cultivate communities that are full of active users and developers who communicate back and forth. Such communication is vital to safely develop a platform everyone can enjoy.
However, if there are inactive or quiet developers on your project watch out for a rug pull scam: it is when someone disappears with the funds raised. Everyone in crypto will say that knowing who the team behind a project is best to do so they can know their intentions. If things go poorly, we should all be aware of scams and not fall victim to them because people might have bad intentions but aren't open about those intentions.
It's best to get involved with projects that have a thriving community. This is something you should do even if you're doing some research before committing. Listing platforms may or may not include an exchangeable token, and it's smart to be aware of this when deciding where your investments are going to go. If a listing platform denies such tokens as viable for their listings, it probably isn't worth investing in.