Scammy or deceptive initiatives can be launched by anyone, and there is nothing to stop them. Technically, nothing. As a community, we can help each other detect some common patterns that distinguish genuine inventions from phony gimmicks.
So what should you keep your eyes peeled for?
This could sound like a silly question, especially if you’re new to the DeFi world.
The vast majority of crypto-assets do not add anything new to the table. Sure, there’s plenty of interesting innovation. After all, that’s why we’re all here! However, many new ventures aim to cash in on the interest in DeFi without even attempting to innovate.
So one question you might have is whether or not this initiative tries to do something unique and innovative. Is their effort attempting to contribute to the new digital economy? What sets it apart from the competition? Is this a one-of-a-kind value proposition?
These are basic, common-sense inquiries. However, by simply asking them, you may immediately eliminate a large percentage of scammers.
Developer activity is another item to consider. DeFi is inextricably linked to the open-source ethos. If you know a little bit about coding, you can look at the code for yourself. The beauty of open-source is that if there’s enough interest in a project, others will undoubtedly help. This will most likely reveal whether the project is malevolent.
You can also take a peek at the development activity. Is the new code being released on a regular basis by the developers? While this measure can be manipulated, it can still be used to determine whether the developers are serious or just looking for a fast buck.
Auditing is a term that gets bandied around a lot when it comes to smart contracts and DeFi. The purpose of audits is to ensure that the code is secure. Despite the fact that audits are an important element of smart contract development, many developers launch their code without them. The danger of using these contracts considerably increases as a result of this.
One thing to keep in mind is that audits are costly. Legitimate initiatives will normally be able to afford audits, whereas scam projects won’t.
So if a project has undergone an audit, does that mean it is fully safe to use? No. Audits are vital, but no audit can ever guarantee complete security. Always keep in mind the dangers of putting money into a smart contract.
The freedom of anonymity (and pseudonymity) that the Internet may afford is deeply ingrained in the cryptographic realm. After all, we’ll almost certainly never know who Satoshi Nakamoto was, the individual (or group) who invented the first cryptocurrency.
Teams with anonymous founders represent an extra risk to consider. There’s a significant risk they won’t be held accountable if they turn out to be con artists. Even while on-chain analysis techniques are becoming more advanced, it’s still different if the founders’ reputation is linked to their real-world identities.
It’s important to keep in mind that not all projects conducted by anonymous teams are shams. There are numerous examples of respectable projects involving anonymous crews. When evaluating projects, you should still consider the implications of team anonymity.
So are projects with anonymous founders a terrible idea? No. Is it more difficult to hold projects with anonymous founders accountable for bad behavior? Yes.
Yield farming (also known as liquidity mining) is a new technique for DeFi tokens to be launched. This distribution strategy is used by many new DeFi projects since it can help the project achieve positive distribution metrics. The concept is that users put their money into smart contracts in exchange for a piece of the newly created tokens.
I’m sure you can see where this is going. Some projects will simply take the monies from the liquidity pool outright. Some will employ more advanced techniques or have a large pre-mine.
Furthermore, new altcoins are frequently listed first on automated market makers (AMMs) like Uniswap or Sushiswap. If the project team is already providing a significant amount of liquidity for the market pair on the AMM, they can simply remove it and dump the tokens on the market. The token price usually drops to zero as a result of this. This is known as a rug pull since there isn’t much of a market left to sell in.
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