DeFi Scams 101: How do you protect from crypto scams

Cryptocurrency scams abound in the DeFi industry. This guide will teach you how to avoid blockchain scams, cryptocurrency fraud, and other types of fraud. Cryptocurrency scams abound in the DeFi industry. This guide will teach you how to avoid blockchain scams, cryptocurrency fraud, and other types of fraud.

cryptocurrency,cryptocurrency news,how to avoid cryptocurrency taxes,cryptocurrency for beginners,cryptocurrency explained,how to invest in cryptocurrency,how to make a cryptocurrency,biggest cryptocurrency scams,how to buy cryptocurrency,how to report cryptocurrency on taxes,cryptocurrency scams,how cryptocurrency scams work,cryptocurrency scams 2021,how to calculate cryptocurrency taxes,cryptocurrency to invest in 2021,how to file cryptocurrency taxes

Cryptocurrency scams ruining DeFi enthusiasm

Many crypto enthusiasts will argue that decentralized finance (DeFi) is a revolutionary next step in finance. A new space like this could potentially provide users with new ways to make money while also contributing to a larger-than-life community-run purpose.

However, there are some drawbacks to DeFi's innovations. There are numerous cryptocurrency scams, Bitcoin (BTC) fraud, blockchain scams, and other wallet-threatening scenarios in the industry.

Cryptocurrency scams and theft in the DeFi sector totaled more than $12 billion in crypto assets stolen from user wallets and exchange holdings in 2021 alone. Part of this theft was caused by poorly programmed smart contracts and platform security flaws, but the majority was caused by cryptocurrency fraud, with bad actors preying on inexperienced users.

For the crypto scene to truly enter the mainstream, the industry must see these scams and security flaws addressed. Unfortunately, the industry may need some time to address the issue of blockchain scams. Until that time comes, this guide will educate users on how cryptocurrency scams work and how to spot them.

How DeFi improves on traditional finance

While the benefits of decentralization are obvious to crypto enthusiasts, the security and accessibility improvements that come with a decentralized finance network cannot be overstated. Despite the current cryptocurrency scammer list of attacks, DeFi upgrades can bring significant positive changes to mainstream finance.

Banks and online platforms in traditional finance have a single point of contact: a server. While servers are highly secure, there is little a company can do if its servers are compromised. Once inside, a thief has access to valuable information such as passwords and addresses.

However, decentralization distributes access to various points of contact around the world: the users. Users, also known as nodes in a DeFi network, are usually incentivized to keep parts of the network on their connected device. The more nodes that are connected to a network, the more secure it will be. Instead of a single point of attack, a bad actor would need to gain control of 51 percent of the network's nodes, which isn't impossible but is extremely unlikely.

Accessibility is also enhanced by nodes. Because a network is distributed globally through users' devices, anyone can connect to and use any decentralized network they want. Users who are connected to the network can send funds and interact with the network in other ways without the limitations that exist in traditional finance.

For example, one can send money to a family member halfway around the world almost instantly, avoiding the fees and wait times associated with traditional international transfers. Furthermore, there is no central entity to block users' transactions or charge them extra for unknown reasons.

Nodes also retain complete control over changes and upgrades to a DeFi network. In contrast to the traditional method of a centralized entity implementing changes regardless of user wants and needs, users must propose and vote on a change in order for it to be implemented. If a network detects a suspicious transaction, it is up to the users to vote on whether or not to reverse it. Decentralization does give users the ability to make decisions.

However, with all of the power that DeFi provides, that power comes with its own set of issues, such as fraud, human error, and bad intent — as well as the responsibility to solve them.

Various ways hackers use to commit cryptocurrency fraud

Giving power to users via blockchain is appealing in and of itself to many. It's understandable that users are tired of centralized entities telling them what to do. However, great power comes with great responsibility, and if DeFi creators fail to meet those responsibilities, the consequences can be disastrous.

Humans create decentralized finance platforms by arranging various actions and capabilities to provide their features. However, with human input comes human error, and it is in man-made error that the exploits emerge.

Projects appear left and right in the world of DeFi. Being first to the game is critical to success, and programmers who rush their code are bound to leave holes. Given that blockchain projects are entirely open source, which means their code is available to all, those with malicious intent will exploit those flaws to steal funds and otherwise abuse a platform.

While code can be reviewed and fixed by a third party, the process is costly, particularly in the nascent blockchain industry. Many projects struggle to obtain even basic development funding. Finding funding for an audit can be challenging, and projects may proceed without a proper code examination.

Of course, traditional finance platforms built on traditional code and servers are vulnerable to human error and attack as well. However, traditional platforms are programmed using tried and true security methods that have undergone decades of field testing and do not face the challenge of programming automated smart contracts. Blockchain-based platforms do not have that luxury, which means errors can appear without warning while developers scramble to find a solution.

Then there's the question of ambition. Some projects are (relatively) simple token swap platforms, allowing users to easily swap one token for another. Others want to tokenize and automate the entire world we live in, giving users new ways to interact with traditional applications and services. Building smart contracts that interact with other smart contracts, among other functions, means that more errors are bound to appear as platforms become broader with more diverse intentions.

Decentralization is half of what defines DeFi, but some platforms take it more seriously than others. If a project is overly centralized, it faces the same risks as traditional finance platforms that run on traditional servers, despite promising the opposite. Bad actors would most likely have an easier time.

How to recognize crypto scams and DeFi scams and how to avoid them

While it is impossible to prevent crypto fraud and theft across the industry, the following common scams should be on the radar of every DeFi trader.

crypto scams,crypto scams 2022,crypto scams on telegram,scams in defi,crypto scams to avoid,telegram crypto scams,telegram scams,crypto scams explained,#cryptocurrency scams,top scams in defi,6 top scams in defi,crypto scams are everywhere,telegram group scams,how to spot scams in defi,how to spot scams in decentralized finance,future of crypto,defiscams,defi scam,economics of token engineering,scam,crypto scam

A rug pull

Rug pulls are one of the most common cryptocurrency scams in the DeFi space, but they are also one of the easiest to spot for those who know what to look for.

When developers promote what appears to be an exciting revolutionary project, this is known as a rug pull. They build a following and attract hundreds of thousands, if not millions, of dollars in investment.

Then, one day, these developers sell the tokens and vanish with the money. These developers had no intention of constructing a project with the funds provided by investors. They simply wanted to pull a con. Investors will be left with nothing, and the project will come to an end. Investors are essentially having the rug pulled out from under them.

It is possible to spot a rug pulled from a mile away by paying attention to a developer's relationship with their communities as well as their token distribution plans. If a project fails to specify any sort of token lock-up period, particularly one for developers, then these teams can do whatever they want with tokens at any time.

To prevent developers from running off with funds, it's best to align with projects that have detailed token lock-up periods. In general, these projects will be very open with their communities, providing regular updates and a long-term plan. (A pump and dump scam, while not unique to DeFi, is very similar to a rug pull.)

When a project is declared "unruggable," it means that the development team did not contribute a large number of tokens. For example, a project may be labeled unruggable if it lacks the significant identifier of team-held tokens that could be used in a rug pull or exit scam.

Another indicator that a project is unruggable is if the team relinquishes control of any tokens obtained during a presale.

Social media scams

Scam accounts impersonating various celebrities — some in the crypto space and others not — can be found all over Twitter. In any case, these imposters will contact crypto enthusiasts about their new project and may pretend to hold giveaways and competitions in which users must send funds to a specific address.

It is simple to determine whether these accounts are legitimate. In comparison to the millions of followers on the actual celebrity account, an impersonator will most likely have a few thousand followers. Basic grammatical errors and misspellings are common in these accounts. Regardless, one should never respond to or send money to a Twitter account in the first place.

Such a seemingly simple cryptocurrency fraud scheme may appear absurd, but it occurs on a daily basis. In fact, bad actors hacked legitimate celebrity accounts in 2020 to send out such fraudulent tweets.

Phishing scams

Phishing is a scam tactic as old as the internet itself, in which scammers pose as legitimate businesses in order to obtain personal information from their victims.

DeFi phishing is typically carried out via email, with a bad actor impersonating a representative from a trading platform or protocol. A scammer will invent a mistake, such as "your account has been compromised." Please send us your email address and password so that we can secure it." Such tactics may include requesting wallet addresses and passwords, as well as requesting funds from the victim.

Phishing emails may contain links to fake websites that look similar to an existing platform, luring victims to enter their personal information only to have it stolen by scammers.

To avoid falling victim to phishing blockchain scams, always check the contact's email address. Instead of a website name, the email is frequently filled with random characters. Otherwise, never click on a link in an email that appears to be suspicious. To avoid such scams, navigate to a platform's website manually and double-check URLs if there is a legitimate security issue. For example, ensuring that the URL has a https security certificate and that it is spelled correctly.

General security measures to follow

It is critical to keep an eye out for the aforementioned scams and frauds within DeFi, but there are some generalized methods available to help one stay off a cryptocurrency scammer list.

Two-factor authentication (2FA)

Whatever area of DeFi one chooses to invest in, all platforms should include some form of two-factor authentication. 2FA is a security measure that sends a text or email to a verified account after the user enters their password. Even if a bad actor obtains one's password, they will need access to a mobile device or email in order to break into an account.

Use a hardware wallet

Hardware wallets are external devices that store users' private keys. As the DeFi space evolves, more decentralized applications (DApps) are becoming compatible with hardware wallets, allowing users to store their assets in a secure location while still having easy access to their preferred DeFi platforms.

Even if a platform provides an online wallet, it's difficult to recommend storing one's assets in that wallet. Users expose their funds to theft by storing assets online. DeFi attacks frequently cause thousands of users to lose millions of dollars. By denying a platform access to users' funds, users increase their security by one level.

Investigate a community

Successful DeFi projects frequently foster a thriving community of active users and developers who exchange ideas. Such communication is essential for developing a platform that everyone can enjoy safely.

However, if a project has inactive or quiet developers, they could be planning a rug pull or other type of scam. Crypto enthusiasts will always advise you to get to know the people behind a project. There is reason to suspect a team has bad intentions if they keep their plans hidden or do not communicate with their community.

It is recommended to participate in projects with vibrant communities and, even then, to conduct additional research before forming an opinion. One should also consider listing platforms and why they may or may not include a token. If a listing platform rejects a token, it is most likely not one to invest in.

No comments
Post a Comment

    Reading Mode :
    Font Size
    lines height