Decentralized finance (commonly referred to as DeFi) is a blockchain-based form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks to offer traditional financial instruments, and instead utilizes smart contracts on blockchains. It also allows anyone to start up a tokenized business or invest in the very beginning of it. But, with lack of regulations in DeFi, anyone with bad intentions is also able to take advantage of those less experienced. Malicious & unfair behavior in crypto space comes in many forms: rug pulls, exit scams, marketing scams, unfair reward systems etc.
Rug pulls are by far the most popular way for scammers to steal investor's money in micro cap DeFi space. They are usually executed through removing all the LP (Liquidity Pool) tokens, minting substantial amount of new tokens (making holders' tokens worthless), manipulating with wallets etc. Those actions are often preceded by aggressive marketing and lying to investors. There are ways to spot a potential scam, but with no guarantees
- scammers get more & more sophisticated in luring people into rug pulls.
Most often associated with presales, exit scams are more sophisticated and harder to spot than ordinary rug pull. People behind these kind of schemes usually make compelling promises with good-looking websites and big marketing campaigns. In big majority of cases, presale caps are set at several hundred thousand dollars (from which a big % goes directly into scammers' pocket). After the presale is completed, creators take investors' money and abandon the project. People who participated in the presale are left on their own. From time to time, there are certain attempts by the communities to takeover the abandoned project, but in most cases such attempts fail because of the lack of funding.
"u need a shiller?"
Everyone (and their grandma) knows that a good marketing plays a major role in success of a DeFi project. Actually, crypto marketing has become quite a lucrative business - and eventually (such as every prosperous profession) it attracted scammers.
Marketing scammers usually target owners of upcoming DeFi projects with low budgets. They offer all kinds of services that aren't provided after the payment, or even if they are provided - they are faked or don't have any effect on the growth of the project. Hiring those kind of individuals often leads to depletion of substantial amount of project's initial funding
- in many cases ending with total bankruptcy.
In the end, best marketing is always led by passionate community grouped around project with good product. But, with dozen of new projects popping out every day and unfair reward systems, it's never been harder for a DeFi project to maintain investors' loyalty.
Unfair Reward Systems
Reward systems in crypto industry have first been introduced in form of mining Bitcoin. Miners were rewarded for validating transactions on the blockchain with new BTC tokens. New blockchains also adopted this system in similar forms.
When it comes to DeFi, most famous reward system was introduced by yield farming (providing certain protocol with LP tokens in exchange of getting annual percentage yield on that protocol's tokens). Lately, new DeFi projects introduced passive yield farming systems (holders of the token get rewarded from every transaction of that token).
The problem with all of this systems is that it's solely based on initial investment - the more money you invest, the quicker and bigger your rewards are. This often leads to serious problems (such as several whales completely draining out smaller projects' liquidity in matter of hours or even minutes - leaving rest of the investors "rekt").