Decentralized finance (DeFi) is a rapidly growing aspect of the crypto industry that has so much potential. With the much potential however also comes high risk of scams. Investors have fallen victim to such scams many times, and still do.
Most times, the reason is that they got into an investment that was a scam from the beginning. The problem isn’t the project, the problem is that the investors could not identify that the project was likely to be a scam.
In order to avoid investing in scam projects, you must learn some signs and indicators of a scam project, and ensure to avoid such projects like a plague. Having said that, here are five signs of a scam project that you should note the next time you wish to invest in a DeFi project.
No Clear Objective
DeFi is an exciting ecosystem, with many players entering it without caution. Some creators know this, so they create projects that just take advantage of the hype without offering any innovation. Such projects are usually just scam projects out to steal your money rather than coming to add value.
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Before investing in a DeFi project, take time to check if the project has anything new to offer to the space. If there’s no innovation, no fresh idea, or meaningful addition to what is already known, such a project is most likely a scam project you should avoid by all means.
No Continuous Development
This is a somewhat technical point, but it is a necessary one to note in your quest to unveil the intentions behind a project. Any reliable project will have a buzz of development activity around it. To find out, you can check the code behind the project, since it should be open-source.
There should be a lot of development activity going on with the coding, both by the team and by other persons outside. If this is missing, it may be a sign that the project is just out to scoop what it can and disappear.
No Smart Contract Audit
DeFi projects run on smart contracts, since they don’t involve human interference as much as centralized systems. Unfortunately, smart contracts are susceptible to errors, making them dangerous. As a result, any trustworthy project engages in smart contract audits to ensure that the smart contract is safe.
A smart contract audit is performed by an external party and they are expensive. It is likely that a DeFi project is legit if it can afford to pay for a smart contract audit. If there’s no record of a smart contract audit for the project, you’re probably looking at a scam DeFi project.
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An Anonymous Team
DeFi projects with legit teams are usually eager to share details of such teams with the public and particularly investors. Such details as team members, their names, and other information is usually boldly displayed on the website as this increases the integrity of the project.
If a DeFi project is reluctant to share such details, it may be a red flag. What it could mean is that the unknown team wants to scam investors and just disappear without a trace, and you should avoid them.
Shady Tokenomics
The token distribution of a DeFi project says more about it than you may think. Scam DeFi founders usually hold a large portion of the tokens and distribute a smaller portion to investors etc. That way, they can hype the project on social media and then dump the tokens on unsuspecting investors when the price goes up.
If the project does not involve a transparent process such as an initial coin offering (ICO) or an initial exchange offering (IEO), it is probably a scam project. If there’s absence of detailed information on the project’s token distribution, that in itself is a red flag and you should think twice about such a project.
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