How to Spot Defi Scams?

Forex Fraud Analyst Team

How to Spot Defi Scams

DeFi, the abbreviation for Decentralized Finance, comprises peer-to-peer or cryptocurrency-based transactions and other services on public blockchains. While digital currencies such as Bitcoin or Ethereum operate on their blockchain and are considered a store of value, DeFi is a decentralized financial service built on public blockchains that allow users to carry out a range of financial activities against their crypto holdings. With DeFI, you can borrow, lend, earn interest, trade in assets, buy insurance, etc., without centralized financial institutions or third parties that are constantly monitored by governing and regulatory bodies. Besides, you don’t have to endure the enormous paperwork of the traditional financial/banking systems, pay expensive fees, or share your personal information.

The applications for DeFi are limitless and include Asset Management, Data Analytics, Digital Identity, Decentralized Autonomous Organizations (DAOs), compliance using Know-Your-Transaction (KYT), Derivatives, Insurance, and many more. In addition, some peer-to-peer borrowing and lending test cases already exist in the market and, if they prove successful, will rigorously compete with traditional banking systems. For instance, let’s say you invest in a term deposit with a bank and earn 4% per annum as interest. The bank, in turn, lends it to borrowers at 8% per annum, pocketing 4% profits. However, when people use DeFi, they employ the core technology behind blockchain and cryptocurrencies to lend money directly to others at 8%, cutting off the bank’s profits. All participants have complete access to the transactions, making it an open, free, and fair marketplace, revolutionizing the financial services industry and providing users with new ways to earn money.

While the cutting-edge technology behind DeFi has several benefits, such as accessibility, transparency, functional autonomy, low fees, and increased profits, they have their drawbacks as they’re exposed to scammers, making them significantly risky. This article looks at the various DeFi scams, how to spot and avoid them, and some of the safest crypto brokers in the industry.

Types of DeFi Scams

The power of DeFi is appealing to many investors, giving centralized entities a run for their money. Social media is a major source of information for crypto enthusiasts and has literally become a virtual gathering place for investors. However, this space is also infiltrated by scam artists, who target unsuspecting individuals, get them to invest in cryptos through fake promotions and other methods, and eventually rob them of their cash. Here are a few DeFi scams that are pretty widespread-


This scam is generally promoted as an exciting project, drawing hundreds of thousands of investors who bring in millions of dollars. However, one fine day, the promoters sell the tokens and disappear with the money. This is the most common DeFi scam; as the name suggests, the promoters never intended to develop the project. Instead, they waited for adequate investors to buy the token before pulling the rug underneath them.

A typical example of rug-pull is the ‘Squid Game’ inspired SQUID crypto scam in November 2021, which collapsed from $2800 to zero within minutes. The developers of SQUID are alleged to have cashed out about $3 million in investors’ money and disappeared.

Pump and dump

This is one of the oldest scams where the price of worthless cryptos is inflated quickly by disseminating false information, allowing perpetrators and their associates to sell a large portion of their holdings on the rise before being dumped. The fraudulent activity drives unwary buyers to accumulate the crypto at sky-high prices, leaving them with massive losses. Pump and dump are usually carried out by organized teams of active individuals on several social media platforms. The groups generally have a hierarchy-based system, and members move up the ladder as they recruit new affiliates. Some of these pump-and-dump schemes even have member subscriptions, with the fee usually charged in cryptos.

A distinctive instance of a pump and dump is the EthereumMax token promoted by celebrities Kim Kardashian and Floyd Mayweather. In May 2021, scammers drove the crypto to all-time highs before dumping it to almost nothing a month later.


Scammers pretending to be legitimate companies gathering personal information about their victims is called DeFi phishing. The hacking or phishing is typically done via emails, with bad actors informing users that their accounts are compromised and asking them to share their wallet addresses and passwords to set it straight. The phishing emails might carry the actual company’s name somewhere, but the link leads to fake websites that are identical to the existing platform. As soon as the victims input their private info, the scammers steal it.

According to research carried out by crypto data firm, Chainalysis, scam operators seized over $7.7 billion worth of cryptocurrencies from unsuspecting individuals worldwide in 2021, with rug-pulls accounting for about $2.8 billion. The data firm also said that the total revenue from the DeFi and crypto scams surged by 81% year-on-year in 2021 from just 1% the previous year. With new users targeted daily, DeFi and crypto scams pose one of the biggest threats to cryptocurrency’s continued acceptance.

How to Spot DeFi Scams?

One way to spot DeFi scams is to pay attention to the developer’s token distribution proposal. If the project does not provide a substantial lock-in period for promoters, they can run away with the funds anytime, leaving investors high and dry. On the other hand, promoters who are serious about the project will not only lock in their investments for a few years but will constantly update the investor community about the project, the scope, and how they intend to develop it.

You can spot phishing scams by checking the scammer’s email address thoroughly for random characters instead of the actual website link, a suspicious email link, or a URL that does not have an HTTPS security certificate. These are clear signs of phishing, and you should avoid clicking links with suspicious-looking emails.

Avoiding DeFi Scams

The advent of social media and other online platforms has made our lives easier regarding gathering information about cryptocurrencies. However, it has helped scammers get more organized too. They have progressed from boiler rooms and call centres to chat rooms, messaging apps, boards, and other venues where they sway even professional investors into taking more risks than previously intended.

The following are some of the ways to evade DeFi scams:

  • Firstly, avoid new tokens that have not gone through a code audit. This process comprises a third party analyzing the code of a smart contract of a new token or a DeFi project and publicly confirming that the code governing the protocols is reliable and developers can’t walk away with investors’ money.
  • Look for a DeFi platform with a two-factor authorization (2FA), where an additional identification process is used to authorize a transaction after you log in with your password. Although there are several different authentication methods, the popular ones are hardware tokens, push notifications, sms/email verification, and voice-based. The advantage of 2FA is that even if a scamster has access to a user’s password, they would still need access to the user’s email or mobile device to break into their account.
  • Safeguard the private keys of your crypto wallet. Although there are several wallet options to store cryptos, cold or hardware wallets are one of the safest options to store private keys.

Scamsters are everywhere, and if you want to avoid being scammed, research before investing in any DeFi project. Also, mitigate risk by diversifying across DeFi protocols, and lastly, keep yourself updated on the recent developments in the DeFi space to pursue new prospects.

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The Safest Crypto Brokers

All investments carry risks, and with the massive growth in the cryptocurrency industry over the past few years, scammers are always on the prowl to steal your money. Therefore, if cryptocurrencies interest you, you might want to invest with reputed crypto brokers who have been in the industry for a while now.

We have carried out extensive research on the crypto industry and would suggest you take a look at our recommended brokers in the table below before signing up with an alternate broker.

Broker Features Min Deposit EURUSD Spread  
Number One Broker Forex Broker eToro Logo76% of CFD traders lose money US Clients: No Regulated : Yes
  • Social Trading Platform
  • FCA & CySEC Regulated
  • Minimum Deposit $50 (varying across region)
  • Demo Account
  • Copy Trading
  • 2000+ Instruments
$50 (varying by Country)from 1
Sign Up 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
AvaTrade LogoYour capital is at risk US Clients: No Regulated : Yes

40% New Member Bonus
– MIFID, ASIC, FSA & FSCA regulated
– Free Online Trading Coach


Sign Up Europe* CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.


    The global market size for decentralized Finance (DeFi) grew to $13.61 billion in 2022 from $3.2 billion the previous year, a solid year-on-year growth of 325%. According to crypto experts, DeFi is projected to expand at a compounded annual growth rate (CAGR) of 46% from 2023- 2030.

    The blockchain ecosystem has given us new technological competencies in the form of digital assets, smart contracts, and decentralized applications, the essential components that make up Decentralized Finance (DeFi). DeFi has pioneered innovative financial concepts like synthetic assets, adding value to blockchain technology and providing a viable substitute to the traditional financial system comprising third parties or intermediaries.

    However, like all decentralized blockchain networks trading cryptos, DeFi has its risks. The technology aiming to disrupt the traditional banking sector has plenty of potential scamsters who lure both novices and professionals with the greed of potential gains and massive passive income.

    With the financial sector undergoing a rapid shift due to the success of DeFi, it’s time to explore new alternatives, but it is advisable to tread cautiously as the industry is still in its infancy, and several risks remain.