How to Spot Today's Trending DeFi and Crypto Scams and Avoid Getting Caught

Hello, this is Bitpunk. Today I'd like to talk about how to spot scam projects in DeFi and crypto, and how to protect yourself from them. Because regulation of the crypto world is still lacking, investors should carefully weigh the following factors before making an investment.

1. Excessively high returns

If something looks too good, there's usually a matching level of risk. Remember that the amount of risk you take on is proportional not only to your chances of making a profit but also to your chances of taking a loss. In other words, rate of return = rate of risk taken. If a project boasts excessively high returns, the figure is most likely very temporary, and the project may well be a scam.

2. What is the purpose of the project?

Anyone who invests in ordinary stocks would naturally ask this question, but it's often overlooked when investing in highly speculative crypto projects. Ask yourself what exactly this project is trying to do.

If it's just another coin launched by slightly tweaking an existing project without any real innovation, development will likely drag along sluggishly and the token's value will likely keep falling.

3. How active is development?

One of the most important things to check when assessing a project for scams, fraud, and future prospects is its development progress. How actively is the dev team building? Crypto DeFi projects are usually run as open source, so if you can read code, it's a good idea to visit places like GitHub and check for yourself.

On top of that, if the code has been audited, you can consider the team somewhat more trustworthy. Audits aren't cheap, so having gone through one is evidence that the team genuinely wants to develop its project. Of course, being audited doesn't mean it's 100% safe.

4. So, who is leading this project?

In crypto, many people operate anonymously. The best-known example is Satoshi Nakamoto, the creator of Bitcoin. To this day, no one knows who he really is. But Bitcoin is a rather exceptional case, and if a team is made up of anonymous members, you need to be very careful. That's because when a problem actually arises, there's a very high chance they'll simply shut the project down or run off with the money.

5. How were the tokens distributed?

Another thing to look at carefully is how the tokens are distributed. Supply is usually split among the team, partners, strategic reserves, marketing, developers, and so on, but if you think about it for just one more moment, they all amount to the same thing. In other words, team = partners = strategic reserves = marketing = all just another way of saying "mine". Even if a project looks promising, if this initial distribution is unreasonably skewed, there's a high chance of a dump coming soon.

Beyond that, you should also look at how the tokens are being distributed now, after launch. Check whether the project is handing out excessive amounts of tokens through giveaway-style airdrops, or whether early miners have already mined and are holding a large share.

6. Understand the risks of automated market makers (AMMs)

Since the rise of DeFi, scams in the crypto world have become considerably more sophisticated than before. Anyone can launch a token on Uniswap and the like and supply fake liquidity. If the team is supplying a large share of the liquidity to an automated market maker, there's no predicting when they might run off with the money. In other words, while the token price is climbing, the team will pull all the liquidity, dump their own tokens, and quietly disappear with the ETH. And the investors who trusted the team and supplied liquidity are left bearing the full brunt of the damage.

Closing thoughts

Spotting scams in the crypto world, and especially in DeFi, is genuinely difficult. Even people who had never been scammed before have fallen victim to exit scams and rug pulls in DeFi projects.

If you want to avoid getting scammed in the crypto and DeFi world, and to minimize any potential damage, be sure to consider the following.

1. Are the project's returns and similar figures too good to be true?

2. What is the purpose of the project?

3. How actively and openly is development being carried out?

4. Who are the team members?

5. How are the tokens being distributed?

6. What risks come with participating in this project?

7. Am I overextending myself by investing more than I can afford to lose?