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Decentralized finance has a lot of promise for investors but is also rife with danger. Here’s what you should know and how to avoid getting scammed.
Decentralized finance—called “DeFi”—refers to the shift from traditional, centralized financial systems to peer-to-peer finance enabled by decentralized technologies built on the Ethereum blockchain. From lending and borrowing platforms to stablecoins and tokenized BTC, the DeFi ecosystem has launched an expansive network of integrated protocols and financial instruments.
While the DeFi ecosystem has unlocked a world of new possibilities for crypto users, it has also given rise to several scams and bad actors. So, let’s explore some of the most common DeFi scams and how to avoid them.
Ponzi Schemes
Ponzi schemes have been around for centuries, but they’ve taken on a new life in the DeFi space. In a Ponzi scheme, early investors are paid returns out of the capital raised from later investors, giving the impression that the project is profitable when it’s actually insolvent. You should read our piece on the BitConnect Ponzi scheme if you want to know more about how it works.
Exit Scams
Exit scams occur when a project raises money from investors and then disappears, taking the money with them. This scam is especially common in the Cryptocurrency ICO space but can also happen in the DeFi space.
Hacks
Since DeFi protocols are built on the Ethereum blockchain,…
