By Larry Wright
With the dawn of decentralization and blockchain technology, it became easier for people to exchange money from one place to another as the whole process got more automated and precise than the conventional modes of finance. It suddenly proposed an opportunity that was missing from the world of finance all these years long, and therefore the probability of decentralized finance came into being.
In the early days, the response was not that great altogether because it was still considered a threat to the conventional modes of finance, the centralized elements, but with its adoption increasing in the coming years and people coming to terms with the elementary aspects of decentralization the decentralized finance started to grow.
Now it has become an industry in itself; it is not only limited to cryptocurrencies but other sources of digital finance such as non-fungible tokens, mining, exchange-traded funds, and many others that are tied directly or indirectly to blockchain technology. This is something that was considered the most secure thing in the whole economy of finance because to be able to gain control of a decentralized financial source, more than 50% of the validators or miners of the network would have to give consensus or otherwise any hacking attempt or security breach would not be possible.
This was the norm back in the day, but with advancements in technology, hackers and scammers have become more refined, and they don’t let any opportunity of them trying to undermine the market and people in it. Scams have become a thing of the present both in the crypto market and in the decentralized finance space, and this is something that shouldn’t be taken lightly.
This thing needs to be stressed more often, not only by the people who are involved in this environment but other personnel who are tied to blockchain technology one way or the other. Because if someone gets access to your crypto or digital finance, then it is not something that can be recovered. It is an extremely unforgiving environment, a little mistake on your part can get you into some serious trouble, you could end up losing everything, and that is something that shouldn’t be taken lightly.
There is no potential way present at the moment to recover your funds if malicious actors or hackers sabotage them or get them rounded up one way or the other. But still, there are some things that you can do on your part to make sure that this doesn’t happen. There are ways you can approach this situation where scammers won’t be able to take advantage of you.
Security Risks Associated with DeFi
There is a lot of innovation going on within the decentralized finance space; this place is something else. You would find people involved from various disciplines trying to solve problems that decentralized finance has at the moment, trying to overcome them in their own fundamental way, thus giving way to way more innovation than the industry can afford at the moment. There are new projects that are getting launched every now and then, and it seems that there is no stopping this space.
This generates a rather tempting space or ground for the opportunity; people don’t want to lose it or let it slip by their hands. They want to grasp it and make something out of it; therefore, the common clause that is ‘do your own research’ is often misinterpreted here.
According to people, there is no time to do their own research about specific projects because when they dive into that specific part, it could chunk away a large portion of their time, something they don’t have in abundance supply because if they give in to all this research, then the opportunity is just going to slide from their hands. People have a fancier way of saying that blockchains are permissionless, and it loosely translates into the fact that these places are public; each and every transaction that has ever occurred in a decentralized manner is visible to everyone who has access to a mobile device and internet.
Another essence of this whole charade is that there isn’t a preliminary requirement of acquiring permission for the sake of using these blockchain systems, developing something on them, or launching projects either independently or in correspondence with a dedicated team or other potential members of the project. The value of decentralized finance is tied directly to the crypto that has the biggest market cap within the crypto market, and that happens to be Bitcoin. While it is a subtle thing but it doesn’t come without some negative aspects.
Since there is no requirement for launching projects or having to ask for permission from someone, it really means that anyone can launch their own projects onto the decentralized space. This gives motivation to people with intent to launch their own projects that are basically a scam and have nothing to do with the betterment of the people or provide the crypto community with something that can help them to build themselves and each other.
But if you say that there is literally nothing that can be done to avoid this pitfall and to stop this scamming aspect from happening, then you must know that there is a lot that can be done. There are specific patterns that can be tied to projects that are a scam and are only there to move people into investing a huge chunk of their finances into them.
By identifying these patterns and discerning them from the legitimate projects, a break way can be generated, which would help people to steer clear of such projects and invest their money only into viable projects. Following are some of the things that can help you to truly understand the potential of a project and understand whether or not it is misleading or not.
Basic Purpose Behind the Project
Many people are so tempted by ‘FOMO’ or the fear of missing out when they see a potential project being launched in a decentralized finance space that they don’t even investigate the authenticity of the project or if it is a subtle one or not. They just want to jump into this project and want a piece of it, but sadly this isn’t how we should approach a dedicated project, especially if it is being launched in a decentralized environment. It is only reasonable to inquire about the authenticity of the project that you are interested in investing; you must be asking questions not only from the leaders of the project but other community members who seem to be entangled or interested in the same project.
There are tons of innovations going around in the decentralized space, and that is something that is kind of a given, so when you are looking into different projects that you must invest in, you should be asking yourself, is this project worth it? Is this something that is innovative enough or just the regular crypto painting that everyone else is selling? The only thing that should tempt you to invest in a dedicated project that is being launched in a decentralized environment is if it is unique and innovative.
If it isn’t anything that meets this specific criterion, then you should not fall victim to this elaborative scam. If a project is not innovative or unique in any sense of the word, then it is clickbait that is trying its hardest to lure your attention into investing in this project. Whereas you should be ignoring this project at all costs.
If all the factors and fingers point towards this project being regular or copy-paste work, then know that it is not going to help you move further within the crypto space, and neither is there any unique value proposition that you are going to find in this specific project. If you give it some thought, then you would find that these are actually common sense questions and are not that hard in themselves. This is going to be something that will help you divert as many scams as you can when steering through the decentralized finance space.
Project Development Activities
Developers of the project should be more involved in each and every transaction that the project is making. Even if it is a simple introduction to the project that is being commenced on social media or some other venue, the developers must be present there to communicate about the project and to take questions from the audience about the authenticity as well as the motive of the project that they are working on.
Most of these decentralized finance projects are open source which means that anyone can build on them or have their own two cents etched into the coding, so there are no stopping people because of the whole permissionless thing, but that doesn’t mean that the developer should just outsource each and everything to other people completely negating the purpose of the project and the original goals towards which this project was headed. If you are a coding enthusiast and know a thing or two about coding, then you should take a look at the code of this project that you are interested in.
The most elementary aspect about these open-source, decentralized finance projects is that these drum up a lot of interest from the people. People are generally interested in finding more about the project, and therefore more people will try to uncover if the project is indeed a scam or have some sort of originality embedded into its code. The development activity for the project should also be given tentative attention. You must understand if the developers are drumming up new code for the project more often or they have outsourced the whole thing to the public. It will be a huge help for you to understand if the developers have the back of the project or they are there to make a quick buck and let the whole thing fall on your head, the investor.
Security Audits for Smart Contracts
There is a lot of talk about auditing when it comes to decentralized finance and smart contracts. An audit is a process that is orchestrated by regulatory authorities to make sure that the code for a digital commodity, crypto, security, or a decentralized finance project is indeed secure. There couldn’t be any loopholes for the sake of securing the investment of the people and their interest within the project. Audits are an extremely significant part of developing a project and launching it over decentralized space.
Every developer should understand the significance of audits and should perform these audits regularly to their code for the sake of making everything as smooth as possible. But there are some developers out there who have no regard for the ingenuity of the process, and therefore they don’t conduct any kind of audits and deploy their codes nonetheless. Such contracts and decentralized finance projects which have been up and running without any kind of audits done for them have a great chance of running into eventual risk. Before putting the whole blame on the developers of the project, there are a few things you must know and understand about these audits.
Audits are extremely expensive; you can’t go about auditing a project if you don’t have the necessary money to conduct or orchestrate this process. If a project is legitimate and the developers are backing the code as well as the development of the project, then by all means, they would have enough investment to add their hands to conduct a proper audit before launching the project. But on the other hand, the projects are illegitimate and have developers with bad intent who only want to scam people and don’t want to trouble themselves with the auditing of their projects or code.
Therefore, if you run into a project and it has been audited, then you can be sure about its security, and it is being secure. But it doesn’t mean that the project would be a 100% legitimate title because no matter how many audits have been done, it still doesn’t ensure the safety of the project and people who are involved in it. Therefore before investing your funds into a smart contract over a decentralized finance project, you must make sure that proper auditing has been done, and you must conduct your own research before putting your foot down and investing a huge chunk of your money.
Founders’ Identities
Decentralization and blockchain technology has provided people with an additional benefit of hiding behind the layers of facades that the internet has brought them with. We don’t have to stretch this thing any further as with the identity of Bitcoin’s creator, Satoshi Nakamoto, no one really knows who he was or is. If he was or is a person or a group, there is no proper evidence available to discern between them. So when it comes to identifying whether a project is deep-rooted in decentralized finance space and is indeed legitimate, you need to understand if the identity of the founders has been rendered anonymous or is there for everyone to see and interact with.
Because if so, then it definitely poses an additional kind of risk that needs to be properly filtered before you step into this space. Because if the project is indeed a scam, then there is a really great chance that the founders couldn’t be held accountable because they don’t exist on paper, something to do with their anonymous identities. Because if the founders are real and they have a dedicated identity, then they would want to uphold their reputation and do everything in their power to make sure that no fingers get pointed towards them at all.
Because otherwise, it would be hurting their real-world identity, something that they don’t want at their hands. While it is a great precautionary step that you can undertake to make sure that you don’t run into a scam, but every project that is led by an anonymous team doesn’t necessarily mean that it is going to end up as a scam. Bitcoin is being run by an anonymous leader or team, and it is still there breathing and kicking in the vastness of the crypto market. It didn’t pan out to be a scam despite the long-lasting beliefs and tantrums that were thrown over its side by people who didn’t have any faith or particular interest in decentralization.
These are some of the metrics that you can go through for the sake of making sure that the crypto project that you are thinking of investing in doesn’t end up being a scam. It is only a good practice to save yourself from being taken away by the harshness and turbidity of something that you know isn’t quite authentic or could end up being a scam to make sure that you avoid falling into that hole. This way, at least you would be able to have some contemplation about the authenticity of the project before diving into it.