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.
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.
- Rug pulls –
The first DeFi red flag is Rug Pull. Rug pull is a kind of exit scam in which the scammers create new tokens and connect them to a base token like Ether or a stable coin after creating a liquidity pool for it. A liquidity pool is a large pool of tokens used by the DeFi protocol to fulfill the trades. Once the other investors begin to inject liquidity in the pool once the token gets popular and the liquidity reaches a certain threshold, the creators seize this opportunity and cash out their position in base coins and exit. This brings the price of the newly issued token crashing down, and the investors suffer heavy losses. To avoid a rug pull, you must do thorough research on the company behind the token and avoid investing in unknown tokens.
- 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.
- 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.
- 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.
- Exploits and vulnerabilities –
- 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.
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.