Defi is simply a system where financial products are available on a public decentralized blockchain network and they are open to anyone to use instead of going through intermediaries like brokerages or banks.
Defi is the abbreviation for Decentralized Finance as well as it is generous with innovations but liable to scam activities.
Defi is a system where software is put on blockchains and this makes it possible for traders, borrowers, and lenders to connect peer-to-peer or with the use of strict software-based middlemen instead of an institution that facilitates transactions.
However, anyone can launch a Defi scam or change the direction of projects.
These are ways to identify common patterns that differentiate legitimate innovations from misleading projects.
Defi positions technology in the spotlight of transactions in financial service industries however, it is usually put in the domain of cryptocurrencies as well as Blockchain although its extent is wider.
Questioning these key areas will help you spot a Defi scam:
Smart contract audits
The first thing to know is that audits are quite expensive and legitimate projects will most likely be able to pay for audits, unlike scam projects who won’t bother.
The audit is something that gets partnered around with smart contracts and Defi
Audits simply ensure that the code is secure and they are also an important part of smart contract development because many developers tend to redistribute their code without any audits. However, this will greatly increase the risk of using these contracts.
Nevertheless, if a project does not have an audit does not mean it is not safe although audits are necessary.
NB: You should understand the risks of paying your funds in a smart contract.
Development Activity
One of the good things about Defi is that it is open source and in open source. This makes it easy to spot Defi scams.
However, when there is a great delight in a project, others will also go into it. This is likely to uncover any suspicious activity.
If you know some things in coding, it is advisable for you to take a look at it so you can be sure.
Also, you can look at the development activity to know if the developers are continuously shipping new code.
With this yardstick it will be measured, it can also be a good test for finding out if the developers are legit or if they just want to make a quick income.
The distribution of Token
Token investment is a very important aspect to consider when looking out for a Defi project.
Another way a scammer can get money is by inflating the price of tokens meanwhile having a substantial holding and dumping it on the market.
If a particular percentage of the circulating supply gets sold in an open market then token price drops and it loses almost all its value and this could lead to problems along the way.
However, you need to consider the method of token distribution as well as if done through a pre-sale or is it available only to insiders who get a great deal before hyping the project on social media.
Make sure to know if they distribute tokens through an airdrop that likely introduces a lot of sell pressure.
In addition, Token distribution models have shades to consider although in many cases, it’s difficult to even have this information, which can be a red flag.
NB: If you prefer to get a full picture of the project, this is absolutely important information.
Anonymous founders
You might want to ask if all founders of a project that choose to stay anonymous are scams.
However, they are not all scams because even the world of crypto is deeply rooted in the freedom of anonymity.
Even with that, the teams with anonymous founders still pose a risk that you need to consider.
The sad thing is if they turn out to be scammers, they might not be held responsible.
Lastly, it is better if their names are at stake along with their businesses.
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