What is DeFi?
DeFi stands for decentralized finance is a term that refers to decentralized applications, protocols, and exchanges. DeFi is a type of financial network that can operate without a centralized authority and often allows peer-to-peer trading options.
For the most part, DeFi protocols are built on Ethereum blockchain or other smart contract enabled blockchains. DeFi protocols are permissioned protocols meaning that everyone can participate. However, the ease of using DeFi protocols has attracted fraudsters and scammers who have stolen millions of dollars from unsuspecting consumers.
What is a DeFi Scam?
A DeFi scam works in the same way as fraudulent schemes in traditional markets work. However, the scammers in DeFi tend to take advantage of the lack of regulatory scrutiny in this sector and defraud investors. Scammers tend to make profits at the expense of other investors.
In some cases, scammers can impersonate a celebrity and ask users to send them money. In other instances, threat actors may use techniques such as pumps and dumps to generate profits.
There are some examples, where scammers create fake or unsustainable crypto projects and leave the project hallway leaving its stakeholders with worthless tokens.
Most Common Types of DeFi Scams
Here are some of the most common types of scams in DeFi:
Phishing scammers try to infiltrate the private accounts of cryptocurrency investors and collect personal information. The goal of a phishing scam is to steal the login credentials of an investor and steal their cryptocurrency holdings. Phishing scams can happen in many ways but the easiest and most common type of phishing happens with impersonation.
Scammers may create a fake website or social media account and ask the users on the same forum to send them virtual currencies. In other instances, scammers can run a Ponzi scheme where fraudster keeps recruiting new investors and paying out the previous ones with new funding.
Investors should never trust a stranger on the internet and perform their due diligence before dealing with anyone on social media.
Identity theft is a serious crime and scammers can try to impersonate as the real person to gain control of their bank accounts, email address, and digital wallets etc. The scammers may also draw massive loans in the name of a person without their knowledge or awareness.
In DeFi, impersonators may manage to steal the private keys or seed phrase of digital wallet and steal all their cryptocurrency holdings.
Pump and Dump Schemes
Pump and dump schemes are a classical type of scam that has infiltrated the DeFi sector. Fraudsters can acquire massive amounts of a relatively unknown token and pump its price artificially.
However, when the price is inflated enough the scammer can sell all their holdings and leave the other investors with considerable losses.
Forgery and Counterfeiting
Scammers in DeFi can try to sell tokens or cryptocurrencies that do not exist or do not have any legitimate basis or use case. In most cases, fraudulent parties can set up fake websites or social media accounts to appear professional.
However, the project does not have any real work behind it and does not intend to solve any real-world problem with it or gain real funding from investors. In other cases, scammers can also try to look and appear as legitimate projects to fool investors.
ICOs or initial Coin Offerings are crowdfunding events that allow startups to collect investment for developing the project. However, scammers may arrange ICOs to collect funds from investors and run away with the money without working on developing the project.
Therefore, investors should perform detailed due diligence before investing in any new coin such as white paper, technical audit, Tokenomics, roadmap, practical utility, etc.
Cryptocurrency investors can hire private investigators or white-hat hackers to help them recover their funds in case of a hack attack. However, it is imperative that investors always make practical decisions and refrain from making emotional assumptions to refrain from falling into the traps of DeFi scammers.