How To Be Cautious In DeFi

Decentralized Finance (DeFi) is the fastest-growing sector in the crypto industry. Despite being relatively new, the transaction value in DeFi has crossed a whopping $92 billion, and the growth is expected to continue. 

Notwithstanding the growth, DeFi is a relatively new concept and is fraught with risks like hacks and scams. Therefore while transacting, you should look out for DeFi red flags so that it will help you identify the potential risks and manage them effectively.

These risks are preventing the enterprise-wide adoption of DeFi in many cases. In this article, we tell you the DeFi red flags so that it will help you identify the potential threats if you are a DeFi user, in the process saving yourself against crypto swindling of any form.

DeFi Protocols v/s Centralised Systems

DeFi protocols are  platforms based on blockchain that offer services  similar to traditional platforms like

  • Interest-bearing accounts
  • Crypto Lending and Borrowing
  • DeFi Insurance

The point of difference from a centralized system is that, in the DeFi platforms, there is no intermediary such as a bank or a broker. You have full access to your assets, which are generally stored in a noncustodial wallet. Since the system is technology-driven, being aware of these DeFi red flags will go a long way in helping you secure your transactions.

Smart Contracts

The whole operation is run based on computer programs called smart contracts that enforce contractual agreements between counterparties. These programs facilitate noncustodial financial services like lending or decentralized exchange. These smart contracts, being software programs, can have vulnerabilities or gaping security holes. This can be identified in time using DeFi red flags that have been discussed later in the article.

DeFi red flags help you identify if the DeFi protocol is a scam or if it is running on a faulty code.

Below, we have listed some DeFi red flags that will help you stay safe in the world of decentralized finance.

  1. Rug pulls
  1. Honeypots – 

The second DeFi red flag is Honeypot. Crypto assets are volatile, but if you see that a new token is suddenly rising in value with no sellers, then that is a DeFi red flag. In this, many buyers are attracted by the rising price of the token, but scammers control the only wallet allowed to sell the token by means of a smart contract.

  1. Phishing attacks – 

The next DeFi red flag is a phishing attack. This happens when the scammer pretends to be a legit company and tricks the user into revealing sensitive information. Some scammers may pretend to be celebrities and try to influence the users. Remember, genuine companies and celebrities never ask you to deposit amounts of money in their accounts.

  1. Fake Google Ads – 

Search engines like Google do not verify the identity of their search results. Most of the time, the first result of your Google search would not be a genuine response, so if you are not able to find much information on the very first result of your Google search, then it is a DeFi red flag.

  1. Exploits and vulnerabilities
  1. Scam Airdrops – 

These scammers drop tokens worth thousands of dollars in the accounts of users connected with some shady website, which may give the scammers the chance to defraud you. Receiving the tokens without is a DeFi red flag that you should guard against.

Final Thoughts 

Finally, we can say that DeFi can be termed the financial system of the future. Just being aware of these DeFi red flags will ensure that your transactions are seamless and risk-free. Log on to Zebpay to begin your foray into the world of decentralized finance.

Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Each investor must do his/her own research or seek independent advice if necessary before initiating any transactions in crypto products and NFTs. The views, thoughts, and opinions expressed in the article belong solely to the author, and not to ZebPay or the author’s employer or other groups or individuals. ZebPay shall not be held liable for any acts or omissions, or losses incurred by the investors. ZebPay has not received any compensation in cash or kind for the above article and the article is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.

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