DeFi projects: Research guidelines before investing in a DeFi project

Cryptocurrency has attracted many investors over the years, including traders, HODLers, and the average FOMO crowd. With the lack of governance from authorities, scams such as rug-pulls and honeypot have been surfacing all over the DeFi world. Scammers, along with legit project developers, are able to list tokens for free on a DEX (decentralised exchanges), without the need for audits. Scammers took advantage of the easy access to pull off malicious manoeuvres, leaving investors with major losses.

Rug Pulls

A rug-pull is an exit scam where scammers, posed as developers removes most of the liquidity from a project, leaving investors with tokens of no value. These manoeuvres often involve scammers who posed as developers hyping a project, promising great returns or amazing utilities. These scammers will often appear legit, with websites and social media accounts set up, fooling even some of the more experienced players in the crypto world.

Honeypots

A honeypot scam project in the DeFi world describes a project that allows you to buy, but denies you the ability to sell. This is a very devious and difficult to spot trick where scammers modify the codes in a smart contract, to only allow sells from certain wallets. This will be extremely difficult to spot for those not trained to read codes. One of the tell-tale signs of a honeypot is when there are only buys and no sell-offs of tokens.

With the increased popularity across DeFi projects, there are bound to be more victims falling for such scams. Luckily for us, there are many tools out there that can be used for research purposes of a new/potential project. This article aims to provide some research guidelines that investors can use to detect red flags or potential dangers.

First check: Check out the project’s website

Scammers usually do not bother to spend too much resources in building their website. If the website has a very poorly designed user interface, it will be a major red flag. You can usually find the project’s tokenomics, whitepaper and roadmaps, which will provide you helpful information about the project which you can include in your decision making. Remember this, if something looks too good to be true, it is usually not!

Second check: Social Media Activity — Youtube, Facebook, Instagram and Twitter

Social media activities can be very informational depending on the type of project it is. For new launches, it is also a place to gather “hype.” Scammers usually will not spend too much effort on maintaining a good social media account. Observe the activities and posts on their social media pages to look out for red flags.

Third check: Mingle around with their community

Telegram is the most popular gathering space for Cryptocurrency investors. DeFi projects usually will have a telegram group set up for their community. Join the project’s community telegram group, mingle around and ask questions when in doubt. You can also spot suspicious red flags like fake hypes, fake accounts and inactive moderators.

Fourth Check:

The internet is a wonderful place. With the trend on crypto, many websites proved to be a great place to work on your research.

Scanning tools
Scanning tools such as BSCscan (for projects using the Binance Smart Chain network) and EtherScan (for projects using the Ethereum chain) is perfect and ready to use for anyone.

You just need to copy the token’s contract address into the search engines and there are readily available information and analytics provided. The major red flags that you can spot are big wallet holders and unlocked liquidity pools.

You can also check out the comments sections, as past victims of scams will post warning messages in that section to keep others away.

Dextools
One of the most amazing tools that you can utilize is Dextools, which provides you live data on the coin of the project that you are researching. Take a look at the chart, if you see a chart with only buys and almost 0 sale, it is likely to be a honey pot.

BSCcheck
BSCcheck is a simple and efficient way to detect if the project has malicious codes lurking about. By entering the contract address of the token, it will do a scan and warn you of the things you need to look out about the project. BSCcheck will also scan for data such as the number of burnt tokens, and you can cross-reference with the announced data and check if it tallies.

Coin Listing websites
Coin listing websites such as CoinMarketCap placed certain rules before a token can be listed. It is not easy to get listed and requires time. Scams usually do not last long enough to be able to get listed on them. Do a check to see if the project has listed their tokens on these listing websites.

Keynote: Always remember that crypto exists in the world of technology, and it is no surprise that malicious scammers will always find ways to work around existing security while covering their tracks from existing tools. The tools that are available are just ways to detect red flags, and does not guarantee to be able to detect all of the scamming methods.

Fifth check: Check for audits

An audit is one of the most important aspects of a new project. Any legit developers out there will want their projects to be backed by audits of reputable companies. Do a check if the projects have gone through any audits, or are planning to go through any audits. If there are no plans for any audits, then it will be highlighted as a very suspicious project.

Conclusion: DeFi world has attracted lots of attention from investors and scammers. There are many research tools out there to minimize the chance of falling victim to such projects. Make these research techniques a habit, and always start with a small amount after deciding to invest.

There is no way you can verify and avoid these scams 100%, be responsible, plan, research and find out every information available before making your next decision.