Scams using cryptocurrency are putting a damper on DeFi excitement
Scams like the Squid Game are common. Every investor’s nightmare is a token rug pull. How can you avoid falling for a hoax without looking like a fool? For more information, visit Forkast.News.
Decentralized finance (DeFi) is a revolutionary next step in finance, according to several crypto enthusiasts. Users may be able to find new methods to generate money while also contributing to a larger-than-life community-run cause in this new environment.
DeFi’s inventions, on the other hand, have certain drawbacks. Cryptocurrency scams, Bitcoin (BTC) fraud, blockchain scams, and other wallet-threatening situations abound in the field.
In the DeFi industry alone, cryptocurrency frauds and theft reached approximately $12 billion in crypto assets taken from user wallets and exchange holdings in 2021. Part of the theft was due to poorly coded smart contracts and platform security flaws, while the majority was due to bitcoin fraud, with unscrupulous actors preying on inexperienced consumers.
What is a rug pull and how does it happen?
A developer builds and attracts investors to a cryptocurrency or DeFi project. Once investors have committed sufficient funds to the project, a dishonest developer may cash out and leave it. This is referred to as a rug pull.
These are often low-effort initiatives, coordinated by persons with evil purpose and whipped together in a matter of days, Sometimes they are slightly modified clones of existing cryptocurrencies.
Let’s start with a look at the three most common forms of rug pulls and how they occur.
1. Stealing liquidity
To make a cryptocurrency tradeable, developers must construct a liquidity pool that holds a certain quantity of the currency and allows investors to purchase and sell it. In the majority of documented rug pulls, the developer established a liquidity pool using his freshly generated scam token and a real cryptocurrency, such as Ether.
People are duped by the scam cryptocurrency’s value proposition and begin purchasing it in exchange for their ETH, which is tied up in the liquidity pool for a certain length of time. As more investors purchase the bogus token and its value rises, more ETH is pushed into the liquidity pool.
2. Disabling the ability to sell tokens
The ultimate outcome of this fraud is the same as that of the previous scam, but the technique is different. In this fraud, the developer includes a piece of code that prevents investors from selling their coins back to the exchange.
Let’s break this down: Investors can purchase fake currency, but due to the bogus piece of code, only the creator can sell his coins. As the price grows to the point that individuals want to cash in to sell their coins, they will learn they are unable to sell the asset. At some time, the scammer will decide that the price is too high, and he will sell all of his scam tokens, fleeing with the value of the investments that had been made.
3. Developers cashing out
In a free market, this does not sound like a fraud, but it is if the initiative is developed for this single reason. The malevolent developer, like in the previous two frauds, builds a project with an exaggerated value proposition. The promise often entails a token feature or platform that is currently under development and will be launched shortly.
However, in fact, the developer just mints a worthless token, either giving himself a substantial portion of these tokens from the start or purchasing them on the market at a low cost. The developer will pay out his shares as the promise of the innovative invention causes investors to acquire the worthless token and the price rises. He can perform all of this at once or over time.
How to recognize crypto scams and DeFi scams and how to avoid them
1. Social media scams
Scam accounts imitating various personalities — some in the crypto field, some not — can be found all over Twitter. Regardless, these impersonators will contact crypto fans to inform them of their new initiative and may arrange contests or competitions in which participants must donate money to a certain address.
It’s simple to see if these accounts are genuine. In comparison to the millions of followers on the legitimate celebrity account, an impersonator is likely to have a few thousand followers. Basic grammatical faults and misspellings are common in these narratives. In any case, one should never react to or give money to a Twitter account in the first place.
2. The project appeared overnight
Rug pulls seem to appear out of nowhere, whereas legitimate cryptocurrencies and DeFi initiatives take years to build. These phony enterprises are frequently backed by a lot of hype, leveraging on currently prevalent cultural memes. If a project that claims to alter the crypto world appears overnight and sounds too good to be true, it most often is.
3. Anonymous developers
While Satoshi Nakamoto, a pseudonymous developer, created Bitcoin, the first and largest cryptocurrency, anonymous creators of a crypto or DeFi project should be a significant warning flag that something is wrong.
The most successful cryptos of today, like as Ethereum and Solana, have a team of well-known leaders driving their growth. If the creators of a cryptocurrency or DeFi project prefer to keep their names out of the public eye and stay anonymous, they may have excellent legal reasons for doing so, and you should probably avoid that coin.
3. Phishing scams
Phishing is an ancient online fraud where scammers pose as reputable organizations and collect personal information from their victims.
DeFi phishing is often carried out by email, with a bad actor impersonating a representative from a trading platform or protocol. A con artist will fabricate an error, such as “your account has been hacked.” Please provide us your email address and password so that we can protect it.” Asking for wallet addresses and passwords, or demanding that the victim turn over money, are examples of such techniques.
Phishing emails may contain links to phony websites that seem and act like a legitimate platform, luring victims to enter personal information only to have it taken by criminals.
4. Low liquidity
You can’t always check the liquidity of DeFi projects, but you can always do it with a cryptocurrency. Low liquidity suggests that converting the token to cash is difficult, which might be due to the creator having a limited number of funding to manufacture the token. The developer may control the token’s price more easily if the liquidity is limited.
The easiest technique to determine a cryptocurrency’s liquidity is to look at its 24-hour trading volume. Scam coins have appeared with trading volumes as low as US$10,000, compared to a true decentralized platform like PancakeSwap, which had a trading volume of US$301 million at the time of writing.
5. Unlocked liquidity
Developers of well-known cryptocurrency projects may frequently relinquish management of the liquidity pool by enclosing it within their blockchain or entrusting it to a trustworthy third party to create confidence and reinforce public opinions of their validity. This is known as locked liquidity, and it stops developers from transacting any of the pool’s tokens, making it impossible to steal tokens or drastically lower liquidity. The longer the pool is sealed up, the less likely a rug pull will occur.
If the liquidity, on the other hand, is not locked, nothing prevents the developers from withdrawing it and making a dash for it. However, determining if the liquidity is locked is a difficult task.
6. Low effort website and lacking social media presence
Scam tokens often have a simple, low-effort website that was cloned or thrown together in a matter of days. Some of these phony enterprises have false websites that state “work in progress” or “coming soon.” These initiatives will also have no or a small number of social media profiles. A lack of real community participation on a crypto or DeFi project’s social media pages should also be a huge warning signal for investors.
This also applies to the white paper for a project. Scam initiatives may include a white paper that is either copy-pasted or extremely brief. The Ethereum whitepaper is 36 pages long, whereas Solana’s is 32 pages long. If a cryptocurrency appears suddenly and has a lot shorter white paper, it is a clue that the project is still in its early stages.
7. Disproportionate token distribution
On platforms like Etherscan, you can look into a project’s token distribution to see who possesses the most tokens and how they are allocated. If a single wallet or two controls a significant portion of the token supply — say, 5% or more – selling all at once is simple, increasing the danger of price manipulation or a rug pull. As a result, the more evenly dispersed the token supply is, the safer the cryptocurrency is to invest in.