For more reasons than one, we must all educate ourselves on how to spot a defi scam. Protecting yourself personally against scammers is definitely an important reason, but there is a bigger picture. As crypto expands into greater adoption, people without any notion of custodial sovereignty or anonymous transacting will find their way into defi. If they get scammed, the first thing they will do is run to regulators. I've already seen this in the ethos of weak-willed YouTube shillers, most of whom have made their crypto gains and now don't care if the landscape changes to reduce profitability for those coming behind them.
Inviting in the vampire of government regulation and institutional custodianship invites back all the problems that crypto was made to solve. Liars like Jaime Dimon, oligarchs like Klaus Schwab and financial imbeciles like Congressman Brad Sherman will again have the power to cheat the world out of its financial autonomy. These guys are no better than your average anonymous defi scam dev — they just conduct their scams under legal cover.
Financial anarchy is not the goal — financial self governance is. Let's all do our part to keep big government out of defi so that crypto can remain a financial haven for those who have been cheated by big banks and oligarchs. We can do this by getting smart about spotting scams, ignoring them and shaming them out of existence.
Here's how to spot and avoid a defi scam.
Read First
I've been the victim of many a scam because I didn't simply check the veracity of the developers behind the project. A simple Telegram or LinkedIn search could have saved me thousands of dollars. The trick is to check in the right way.
Let's start with Telegram. If you look up the name of the project or key devs, the trick is to only consider information from objective sources. To do this, ignore comments from the project's group at first. So-called "FUDders" will be immediately deleted from the group itself for legitimate criticisms.
Consider the opinions and research of verifiable accounts from OUTSIDE the project's main group. If you have legitimate investors who are not connected to the project discussing it in a positive way, you can be more sure of its veracity.
Take note of when LinkedIn profiles were made and who vouches for the skill set of the developers. If the devs look more like marketers than devs, then you may want to think twice about the project. If the devs don't have any previous work or people vouching for their technical skills, this may be a project you want to pass on. You can verify technical prowess through Github as well. Verify the participation of project devs in other projects. They should have long Github histories of participation.
Do not get sucked in by huge APYs. I wrote a couple of posts on the trick of APYs and how you can still lose money there. Take the time to read about the founders. The gains will be there, trust me.
Check Liquidity
One of the easiest ways for a developer to fleece investors is to create a situation of low liquidity. The developer first trades a valuable token for a worthless one through staking or a presale. The developer then removes any liquidity from public pools, disallowing trade from the worthless token to any token of value. With this trick, a developer can keep the valuable tokens while investors are left with the worthless ones.
Many people have caught on to this trick, encouraging developers to "lock liquidity" before releasing a project. Locked liquidity means that developers will never have the opportunity to pull the rug out from under investors through a single act of drying up liquidity. There are many websites that track whether liquidity is locked or not. Before investing in any project, check team.finance or v2.unicrypt.network to see how much liquidity is locked for a token.
Protip: Locking liquidity does not mean that a project is safe. There are other methods for developers to destroy the value of tokens that investors hold, but this is one of the hallmarks of the defi scam.
Check the Community
You can tell a lot about a project by the type of person it attracts. In many cases, the community makes the difference between success and failure (because all projects rely on adoption), but you can also use the community to determine what kind of project you are getting into. In defi, there are two basic project types:
The project with a use case — Projects that are trying to bring a new service into defi. These projects can fail because of bad tokenomics, but most of the time they fail because of simple dev incompetence.
The financial gamesmanship project — This includes ponzi schemes, rebase tokens and other projects that don't aim to produce any real world value. They are created mostly as financial experiments. You will find most scams here.
The community of financial gamesmanship projects are the ones producing memes, asking annoying questions like "wen rebase?" or "wen moon?" and otherwise communicating that they are here for fun. In many cases, these are investors with crypto to burn. They don't care if a project is a scam because they are only looking to pump and dump and leave you with the bag. Scam developers will often target these audiences with airdrops and marketing campaigns geared specifically for them.
If you want to avoid many scams, look for communities with people who discuss real plans of action. Admins in legit groups will be eager to answer questions.
Stay tuned to this channel for even more tips on how to avoid defi scams. As you know, crypto is a constantly evolving animal. The strategies to remain safe are constantly evolving as well.