Unfortunately, in the world of DeFi, scams are very common.
Decentralized finance (DeFi) is a term that has gained enormous popularity over the years. DeFi is the shift from centralized financial systems to peer-to-peer finance enabled by decentralized technologies built on the Ethereum Blockchain.
DeFi promises a more equitable and accessible financial system, but it is still largely unregulated. The lack of regulation has made DeFi a haven for fraudsters, who have looted millions from unsuspecting consumers.
We can summarize a typical scam in three steps:
- The scammer creates a fake project or impersonates an existing one.
- The scammer promotes the fake project or impersonates the existing one to generate interest and attract users.
- The scammer exits the scam, leaving users with worthless tokens or no access to their funds.
Most Common Types of DeFi Scams
Phishing Scams: The most common type of phishing scam in the DeFi space is phishing. This is when a scammer creates a fake website or social media account that looks identical to a legitimate one. They will then use this fake account to try to trick users into sending them money or personal information. Another common type of DeFi scam is the Ponzi scheme. Instead of investing the money, the scammer pays the previous investors.
Scams involving false or stolen identities: Someone uses your personal information to register a new account or access an existing one. They may also use your information to apply for credit cards or loans or to make purchases on your behalf. Another way identity theft can occur is when someone steals your private key or recovery phrase, giving you access to accounts and allowing unauthorized changes or funds to be sent.
Forgery and Fake Digital Assets: This scam usually occurs when someone creates a website or social media account that looks identical to a legitimate project. However, the page has minor changes that allow the scammer to redirect funds to your wallet.
Fraudulent activities associated with initial coin offerings (ICOs): In an OIC, a company offers digital tokens for investors’ fiat currency or cryptocurrency. However, many ICOs are scams, as companies use the funds raised to enrich themselves instead of developing the project. A serious fraud associated with ICOs is when the team behind the project absconds with the funds. This type of fraud is technically an “exit scam.”
How to Protect Yourself from DeFi Scams
At this point, you are probably wondering how you can protect yourself from falling for one of these scams. Below are some tips.
- Do your research.
- Don’t invest more than you can afford to lose.
- Beware of scams on social networks.
- Be careful what links you click and what information you trust.
- Find projects with KYC and audit certifications.
In addition to losing your money, scams in the DeFi sector have several adverse effects on the industry. For example, it undermines trust in decentralized financial protocols and offers free marketing to scammers.
When a user falls for a scam, not only the investor loses money. The entire DeFi industry is negatively affected by it.
To conclude, the best way to protect yourself from DeFi scams is to educate yourself and stay on top of the latest scams. Understanding how these scams work can help you protect yourself and your hard-earned money.
By Audy Castaneda
