Common DeFi, crypto-related scams and how to protect your wallet

It’s been a big year for digital assets. With the growing interest in the space and mainstream acceptance, the value of the crypto market briefly surpassed $3 trillion in November and top coins like bitcoin and ether hit the all-time high. the highest of all time.

But with hype, the scammers saw an opportunity. Between January and July alone, $681 million was mined in major crypto thefts, hacks and frauds, according to intelligence firm CipherTrace.

Overall, this year, many of the most notable hacks involved decentralized finance, or DeFi projects, with more than $10 billion lost to DeFi theft and fraud, a report says. November from blockchain analytics firm Elliptic shows.

While it is impossible to find a sure bet, experts advise investors to fully understand the risks surrounding cryptocurrencies and especially DeFi before buying. Additionally, there are some common scams and pitfalls to watch out for when trying to protect your investments.

Here are some tips.

In June, billionaire investor Mark Cuban made a big loss when trading a DeFi token that ended up falling to zero in a day. His main lesson? “Do your own research,” he tells CNBC Make It.

DeFi or not, investors should do their research before buying into any cryptocurrency or token project.

While no checklist is easy to understand, investors should start by looking at the project or token’s website, where it’s available for purchase, its white paper, and the developers. or founder listed. While these attributes aren’t the only indication of whether something is sketchy, they can be useful when trying to determine what to invest in and reveal more about a project that at first glance might not seem like it. look not clear.

Smart contracts or code collections that execute a set of instructions on the blockchain, are essential for most crypto-based projects to run.

While they can be quite technical, it’s a good idea to check the smart contract behind a project or get someone knowledgeable in the execution space. That’s because if there’s a problem with the developer’s code, there might be a weakness in the project.

When Poly Network, a DeFi platform that connects disparate blockchains, was hacked in August, experts said hackers could exploit a problem with the network’s encryption. Although the hacker eventually returned the stolen funds, this is one of the biggest crypto thefts ever.

John Wu, president of Ava Labs, a group that supports the development of DeFi applications on the Avalanche blockchain, said that’s why it’s a good idea to look for projects that have safety precautions and are well audited. . An audit aims to uncover if there are problems in the development of a project, including whether a central party can control the network or its funds.

Earlier, Wu said some “big red flags” when analyzing a project could include “apps that don’t share code or ignore concerns in forums and social feeds.” them about security”.

And if something doesn’t feel right, it probably is. “When in doubt, trust your guts or seek out more objective members of the community with the technical expertise to scrutinize the code,” says Wu.

Even if a project is audited, there’s still the chance that a sketchy project slips through the cracks, so the experts are clear: You should only invest as much as you can so you don’t lose.

Previously, Meltem Demirors, Chief Strategy Officer of CoinShares said reputation risk is the threat that a project may not be in good standing and may have founders who do not have the best intentions. It is important to try and determine if the founders of the project are trustworthy before investing.

“Some of the best projects are led by anonymous or pseudo-anonymous founders who protect their privacy, so I don’t write projects for that, but I expect transparency. in the app,” Wu said.

“Pump and dump” and “carpet pull” schemes, in which developers abandon a project and leave with investors’ money, frequently occur in the crypto space. In November, a token named after the popular Korean Netflix series “Squid Game” plunged to near zero after its anonymous founders cashed in.

Many social media influencers, celebrities, and even executives have been paid to pump tokens or projects online. But that doesn’t mean it’s worth it or a good investment. Experts say exaggerated social media coverage often results in loss of money.

As the SEC warned in 2017, “it’s never a good idea to make an investment decision just because someone famous says a product or service is a good investment.”

It is extremely important that your private keys, the sequence of letters and numbers similar to the passwords used to unlock access to cryptocurrencies, remain undisclosed to the public.

There are many wallet options available to secure your investments and private keys. With a non-custodial or self-custodial wallet, you have control over your private keys and you own your crypto holdings. While still risky, cold wallets, or hardware wallets, are considered by many to be the safest option for storing private keys.

You should also watch out for bad actors in space. Common scams include sim swapping, in which hackers call your phone company and convince them to hand over your phone number to them to bypass two-factor authentication on your account.

Others try to transfer fictitious tokens to your wallet to try to get the victim to approve a transaction or direct them to a scam project’s website.

Some attackers buy Google ads that appear when users search for popular crypto wallets. When victims click on the ad, thinking it’s a link to their wallet page, they are redirected to a lifelike scam page. Victims enter their credentials, giving their private key to the scammers.

In general, it is important to be skeptical when receiving external messages regarding your crypto wallet. Beware of fake accounts claiming to be crypto influencers or celebrities.

Philip Martin, chief security officer at Coinbase, previously said: “If that is too good to be true then it certainly is. “No one on Twitter is going to send you double what you send them.”

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