The use of Decentralized Apps (DApps) to trade Decentralized Finance (DeFi) is arguably one of the most popular ventures in the crypto world.

The popularity and adoption of crypto currencies continue to rise forming a parabolic curve; rapidly growing with so many crypto enthusiasts and investors interacting with DApps while trading on DeFi platforms on a daily basis.

DeFi SCAMS have become a major problem sufficing in the DeFi crypto sphere; hence the need to protect your capital and assets as you trade in one of the most lucrative crypto sector.

Statistics show that despite the numerous scams in the DeFi space, the decentralized finance sector is flourishing and this is owing to the continuous creation, massive adoption of Decentralized protocols, and daily stealth launches of multiple new innovative projects on multiple Blockchains.

Sadly, Blockchain Statistics confirm that over 90% of everyone that has interacted with DApps have been victims of DeFi scams at one time or another either by having their tokens rug pulled; which is the most popular DeFi scam or scammed off their assets.

Kindly note, that to protect yourself from being scammed in the DeFi space is not a function of how smart or rich you are, but how careful and research conscious you are. Even the rich billionaire investors who have more access to resources are not immune to scams and risks when it comes to decentralized finance, or DeFi.

Billionaire Mark Cuban, once revealed that he was once a victim of DeFi scam when he traded a DeFi token from Iron Finance called titan that ended up crashing to zero in one day.(DeFi Rug Pull Scam)

It then becomes important to learn what DeFi, and DApps are; learn about some examples of DeFi scams and how to identify DeFi scams, in order to trade on DApps  safely avoiding both petty and serious scams.

What is Decentralized Finance (DeFi)?

According to Binance Academy; it is the ecosystem comprised of decentralized financial applications developed on top of Blockchain networks. DeFi may be defined as the movement that promotes the use of decentralized networks and open source software to create multiple types of financial services and products. It promotes the idea to develop and operate financial decentralized applications (DApps) on top of a transparent and trustless framework, such as permissionless blockchains and other peer-to-peer (P2P) protocols.

To summarize this definition; we can conclude that DeFi is the part of the crypto sphere that provides crypto financial services. These services include creating monetary banking services like the issuance of stablecoins; providing peer-to-peer or pooled lending and borrowing platforms and enabling advanced financial instruments such as Decentralized Exchanges (DEX), tokenization platforms, derivatives and predictions markets through the use of smart contracts and distributed systems, thus deploying a financial application or product which becomes much less complex and secure.

For a more comprehensive understanding of DeFi, consider looking it up on Binance Academy via link below: https://academy.binance.com/en/glossary?term=defi?ref=65177765

What are Decentralized Applications (Dapps)?

DApps are applications designed as open-source projects that run on a distributed computing system, that is, a Blockchain network. They are created to fuel their own activity through digital tokens created through the use of smart contracts and provide transparency, decentralization, and resistance to attacks.

For a more comprehensive understanding of DApps, consider looking it up on Binance Academy via link below: https://academy.binance.com/en/glossary/decentralized-application?ref=65177765

SOME EXAMPLES OF DeFi SCAMS

When it comes to identifying scams in the DeFi world, it can be very difficult to identify all of them as new types of scams are developed daily and it becomes almost impossible to spot all of them.

The most logical thing to do is identify the most popular of them and understand the principles required to checkmate DeFi scams and protect yourself especially as you interact with DApps on any of the Blockchain networks.

Let’s examine some of the most popular scams in the DeFi space and then consider what actions are required to checkmate the outlined scams; surely this can guide us to easily identify how to be safe from each of them.

• BACK TO ZERO TOKEN PRICE (RUG PULL)

One of the most notorious and painful scams in the DeFi world and Crypto sphere in general is having the value of your token or asset return back to zero after an initial pump in price value. It is also nicknamed as ‘a honey pot or a pump and dump to zero’ like in the case of the Squid game token.

What is a Rug Pull and how does it happen?

To illustrate this: Imagine you are standing on a piece of Rug and someone pulls the Rug from underneath you without your notice- what happens next is that you will fall down flat. This is practically what happens in a rug pulled project.

The developers of this project claim to be involved in building an innovative project. They secure the services of social media influencers; Youtubers etc in order to capture attention and gather a lot of investors, who end up investing hugely with some project investments running into billions of dollars invested in token purchase and liquidity provided.

The project is then Rug pulled when the project seems to be doing absolutely well with investors happy with the project; and then BOOM; the developers or project owner “pulls-the-rug” off investor’s feet by scooping all the liquidity- taking away all the funds and leaving investors with valueless tokens. The mechanics of Rug Pull projects is always evolving and the most modern tactics employed is allowing investors to buy tokens but can’t sell their purchased token to take profits, thereby trapping their funds and the developers or project owner carting away with all the funds leaving investors with valueless token.

• DeFi FRAUD DUE TO ERRORS IN DApps CODING OR SMART CONTRACT FLAWS

DeFi applications or DApps are coded applications written to operate without a central service exercising control over the entire system. These applications are expertly written with the help of Smart contracts or a collection of codes that carry out a set of instructions on the blockchain. DeFi protocols are essential for most of the crypto-based projects to run smoothly.

Now here is where the scam comes in- when there is an issue with the smart contract or an error in the codes, hackers can take advantage of it to manipulate the system, hack the DApps operation to defraud a project by transferring assets worth billions off the project wallet or individual wallets connected to the DeFi protocols.

An example of DeFi Fraud is the legendary hacker who hacked Polygon- a DeFi platform that connects different Blockchains, by taking advantage of an issue with the coding of the network.

• DeFi WALLET SCAM

While the mechanics of this particular scam is always evolving, the end result remain the same- tricking the wallet owner to release their security phrase or private keys to grant the scammers full access to steal the valuable assets in their wallets.

Some of the techniques employed includes but not limited to;

• Claiming to give away fictitious airdrops and when you try to approve transactions to claim the airdrop, the security of your wallet is compromised with the hackers stealing your valuable assets and leaving you with the fake airdropped tokens.
• Some hackers resort to using phishing websites through “ad links” clicked by wallet owners directing them to fake wallet applications that may require entering their security phrase to import your wallet; thereby compromising the security of your wallet.
• Since many crypto users are wise enough to protect their wallets using a “2 Factor Authentication (2FA)”, some hackers illegally hack or trick network providers to transfer phone number details to theirs thereby passing the 2FA installed in your wallet security, thereby compromising your wallet security.

• LIQUIDITY POOL YIELD SCAM

This is an example of the too good to be true scam. This scam involves been deceived with very high yield percent in order to lure liquidity pool providers to invest in liquidity pools of a scam asset, only to find out that your assets have been hijacked and will be drained by the developers and you end up without anything. NO profits and huge asset losses.

• TOKEN SCAM

This is one of the most popular DeFi scam. This scam is so broad. There are many ways to lose your funds with this scam. I will briefly highlight them below;

AIRDROP SCAM:

Some new tokens claim to be giving airdrops to facilitate the presale purchases of their tokens and thereby creating a massive advert of their tokens with a networking mechanics of airdrop hunters needing to invite or refer others before they can claim the airdropped tokens. After airdrop hunters have referred and advertised the project massively via the referral networking system; they are told they will get their tokens after launch of projects- which they will never get.

Other scam projects go on to ask airdrop hunters to claim their tokens by sending a fee that will be used for transactions fees to send their allotted airdropped tokens to them; others even request the airdrop hunters to connect their wallets through a Web 3.0 wallet to claim their airdrop thereby paying transaction fees.

After all the paid fees and stress to refer and advertise the project, they end up not getting any token or they get a valueless token because the developers abandon the project even before the launch or they only had the intention to scam investors and never meant to launch the project on any network.

PRESALE ALLOCATION:

Some projects claim to organize a presale for tokens before the launch to trade the token publicly. Some of these Presales require locking your funds and so you are told to send funds to a wallet address with the belief that your tokens will be sent back to your same wallet, but it never comes and you lose your funds.

FAIR LAUNCH TOKEN IMPERSONATION:

Making profits with Degen Plays; that is trading a new token without a chart only on the basis of the token name or anticipated projections requires that an investor enters or purchases the tokens quite early.

Scammers take advantage of this by creating a fake token and impersonating the yet to be launched token developers; thus publishing their fake token smart contract address as the expected contract address of the real token and all who fall for his scam lose their funds by buying a fake and valueless token and soon realize that they have been scammed when the original token publish the real contract address at a stipulated time of launch.

MEME TOKENS PURCHASE:

These days anyone can easily create a token and most time Meme tokens are the easiest token projects that look very promising but very risky too as many lose their funds to this type of crypto investment.

Many crypto traders rush to buy a meme token that the developers of the project soon abandon and leave the token holders stranded with huge percentage losses as the early buyers dump the token on the new buyers taking out their invested funds along with huge profits and leaving the late investors with huge significant losses.

The list of DeFi scams while trading on DApps is unending and continuously evolving and cannot be covered in one article; but generally they all follow similar concepts and guiding against them involves educating yourself on procedures and Safety principles you need to imbibe as a DeFi investor to maximally protect your assets and funds at all time.

This line of thought leads us to the next question that we will consider.

HOW CAN YOU STAY SAFE FROM DeFi SCAMS WHILE YOU TRADE ON DApps?

Protecting your assets and Funds is a very important concern; in fact it is much more precious than finding a crypto gem that can 100x your investment because it involves securing your investment capital and all the profits from investments.

The following safety tips and principles can help you trade DeFi tokens safely while using DApps.

• DYOR

This is the most popular crypto slang. It simply means DO YOUR OWN RESEARCH and it is the best and most powerful DeFi Scams defense tool. Always remember that when someone reaches out to you first for any deal that seems too good to be true in the DeFi space or crypto world in general, you must DYOR.

• Always take time to verify who you are in contact with or what platform or channel you have been contacted from so as to be sure and do not let greed inform your decision.
• Research any platform or token you want to invest in.
• What can you research about? Check the tokenomics; investigate the project; find out the team in charge of the project if they are anonymous or their identity is verifiable; conduct a contract analysis to detect if there are any contract issues or coding errors; confirm if the project has been audited by a third party organization or not; read their whitepaper to understand the purpose of the project and if the idea surrounding the project is sustainable or impossible;
• It is also important to check how many followers the project have on social media, how many wallets are holding the token using a Blockchain scanner to scan the token contract address to have an idea of how many people have aped into the project; join the token telegram group or any of their social media handles to check out what other investors are saying about the project; look out for frequently asked questions (FAQs) to determine the project reception by the community to measure the project community strength and then make an informed decision.

Gathering all these info will shed light as to if the project may likely be a scam, a high risk project or a genuine project and then make your decision obviously with reserve funds that you can afford to lose as there are no guarantees in the crypto world, if you decide to invest in a token.

• WALLET SAFETY

This is the most popular thing to do as a crypto investor.

Always remember that when someone reaches out to you to request for your private key or your wallet security phrase, the best thing to do is “RUN AWAY”.

• Do NOT share your passwords and the security seed phrases of your wallets with anyone you do not trust,
• Consider using a very protected wallet such as Trezor but if you can’t afford it, make sure to have security protocols such as 2FA, SMS and Google authentication in your wallets,
• Avoid becoming a victim of phishing by not clicking unverified or unsecured links and URLs,
• Always DYOR and run away from too-good-to-be-true giveaways and airdrops, if you have not done your research.

Protecting yourself 100% while you trade DeFi DApps can be almost impossible to achieve. I must confess with all my crypto knowledge, I have been scammed once or twice in projects that rug pulled and so I have experienced DeFi Scam firsthand; hence the need to always pay attention to these safety principles in order to be safe from scams generally; be it DeFi scam or any other crypto related scam.

Just like in my previous article on How to protect yourself from scam when trading NFT on Binance NFT Marketplace, this article has been personally researched and provided as a guide and not a financial advice.

If you would like to read about some of my other researched articles on crypto investments and how to maximally use the Binance exchange; search through my archives here

While doing your research on DeFi tokens can be very stressful, Do keep in mind, though, that it can be a life saver, it can save your assets and funds; so you should take the time to explore the Binance Academy to find answers to so many questions on crypto topics which can guide you in making wise and informed crypto decisions.

Take for example you can read more about How to Spot Scams in Decentralized Finance (DeFi), research on the meaning of crypto jargons like some of the ones used in this article or any other information regarding cryptocurrency topics that interests you.

To kick start any research on the Binance Academy:

• Simply click https://academy.binance.com/en?ref=65177765, or you can type or copy the link and paste in any web browser of your choice.
• Next type the topic or any question you want to research in the search bar and click search to get the desired information.

Kindly Note that you can also download the Binance Academy App using the link below:

For Android- https://play.google.com/store/apps/details?id=com.academy.binance&hl=en&gl=US

For Apple- https://apps.apple.com/us/app/binance-academy/id1483028447

If you would like a more comprehensive understanding of DeFi, or conduct more research on DeFi Scams; consider looking up this article on Binance Academy via https://academy.binance.com/en/articles/how-to-spot-scams-in-decentralized-finance-defi?ref=65177765.