If you are new to cryptocurrency, you may have heard of the term “DeFi” or “decentralized finance.” DeFi is a crypto movement built on the Ethereum blockchain and enables users to interact with decentralized applications (dApps) without the need for a central authority…
Since defi is still a relatively new concept, it is no surprise that there are several scams in the space. In this article, we will identify and explain the most common types of defi scams, how they operate and protect yourself so that you can be vigilant and avoid them.
Although the DeFi ecosystem has opened up a world of opportunities for crypto users, it has also produced several scams. This article will discuss some of the most common types of DeFi scams and how to avoid them.
What Are DeFi Scams?
Decentralized finance (DeFi) is a new way of financing based on secure distributed ledgers, similar to cryptocurrencies. A term that has gained immense popularity over the years is centralized finance (DeFi). Through decentralized technologies built on the Ethereum blockchain, DeFi enables peer-to-peer financing from centralized financial systems.
A centralized financial institution like a bank or brokerage firm provides consumers with direct access to capital and financial services through rules defined by the Federal Reserve and Securities and Exchange Commission. In contrast to banks and other financial institutions, DeFi does not charge fees for its services.
The DeFi wallet allows individuals to store and transfer money securely, and anyone with an internet connection can access it. There is still little regulation of DeFi, even though it promises a more equitable and accessible financial system. Fraudsters have plucked millions of dollars from unwary consumers due to a lack of regulation.
Why Do Scammers Love DeFi?
Decentralized finance is a digital financial ecosystem that uses a public blockchain for various financial maneuvers. A traditional bank is no longer needed as a middleman. The DeFi space allows you to do everything possible in the legacy banking system without intermediaries, such as lending, borrowing, trading, saving and investing.
This open access lets you do all kinds of stuff directly, peer-to-peer. Since there’s no central financial institution, there’s no need for Know Your Customer (KYC) verifications like picture ID, address, and banking info. There are three reasons scammers love DeFi:

Decentralized
It’s hard to reverse or investigate a scammed crypto transaction, and no governing agency can get involved. There’s no legal or institutional recourse for you. Zero.
Anonymous
An anonymous individual stole your crypto stash. By examining the blockchain, there might be a way to track transactions back to the affected wallet. However, it isn’t easy to find out who owns it.
Permanent and Irreversible Transactions
There is no mechanism for canceling or reversing a transaction. If someone obtains your crypto information, you cannot change your key phrase, as you can with a PIN or a password for online banking. You can only close your wallet with a bank account. You can never get your coins back once you withdraw them.
The Most Common DeFi Scams
In the DeFi sector, there are a variety of scams, and it is essential to remember that some scams are more common than others. Let’s look at some of this industry’s most common criminal schemes.
DeFi Scam #1: Phishing Scams
Despite DeFi’s best efforts, a phishing scam is not immune to the company. The complexity of multiple DeFi protocols has made it easy for fraudsters to target newcomers because of their intricacy.
The DeFi space is prone to phishing scams that involve impersonation. Fraudsters create websites and social media accounts that resemble legitimate ones. Users will then be tricked into sending them money or sensitive personal information through this fake website account.
It is also common to see the Ponzi scheme used in DeFi scams. The fraudster pays out money to previous investors instead of investing it. In the DeFi industry, a similar scam is common because new protocols often yield high returns.
DeFi Scam #2: Wallet Dusting
Insidious and sophisticated dusting scams are often called “dusting.”. If you trade altcoins, use a digital wallet like MetaMask or TrustWallet. They are so-called hot wallets because they function on the cloud and are directly linked to exchange platforms. The Centralized exchanges platform is also vulnerable to wallet attacks.
Fraudsters will deposit an obscure coin into your hot wallet in a dusting scam. There are others like you as well. It is not uncommon for dusting attacks to affect tens of thousands of anonymous wallets. People who hold large amounts of cryptocurrency can be identified using dusting attacks.

DeFi Scam #3: Honeypot Scam
This altcoin scam, like many others, lures investors in by boasting big price projections and big-budget marketing. People start taking profits as the money starts flowing in and prices rise. You are then faced with a dose of reality.
Your altcoin value rockets out of the earth’s atmosphere, heading straight for the moon. You cash out your profits once you decide you are sufficiently wealthy from this obscure coin. Your transaction is rejected due to an error message saying “undefined error.” There is an error message stating “undefined error.” It is probably an issue with one of the tokens you are swapping.”
There’s nothing you can do about your head stuck in honey. You can’t get rich fast, and that’s what happens. Coding allows you to experience this kind of debauchery.
DeFi scam #4: The Rug Pull
Decentralized (DeFi) altcoin crypto space market is full of scams. A few investors or developers hold the majority of a coin’s supply. As soon as they discover that coin, they start promoting and marketing it. The company leverages social media platforms such as Facebook, Instagram, Twitter, YouTube, Telegram, and Reddit to incite a sense of urgency, drive sales, and build demand.
The company makes up wild promises and ridiculous claims about a coin’s use case, its popularity, and its celebrity endorsement to increase sales. The price of the coin skyrockets as new investors buy into the buzz.
It leads to scammers selling all their coins. A sell-off can cause a substantial price drop, sometimes within minutes. Because of this, the rest of the investors hold worthless coins and have no liquid assets to withdraw their winnings. You spend $100 on something worth $1,500 in a moment, and by the end, it is only worth $2.00. It is rug-pulling.
DeFi Scam #5: Counterfeiting And Forgery Of Digital Assets
In the DeFi world, only some projects are original or legitimate. Scammers sell digital assets that are fake or look like other crypto assets, resulting in forgeries and counterfeiting. Usually, scammers create fake websites or social media accounts that look exactly like legitimate projects. Despite these changes, scammers can still access funds in their wallets via the site.
Uniswap, for example, was a popular Defi project cloned on Twitter as a fake. There was a letter difference in the URL between the official account and the one created by this user. Unsuspecting users were cheated out of $150,000 in Ether (ETH) by a scammer who exploited a slight change in the crypto market.
DeFi Scam #6: Fraudulent Activities Associated with Initial Coin Offerings (ICOs)
As a final note, ICOs are usually associated with fraudulent activities. The purpose of an ICO is for a company to offer digital tokens as part of its offering of fiat currency or cryptocurrency to investors. ICOs are often scams, with companies using the money they raise from selling tokens to make money instead of investing the funds in developing their projects.
One of the severe frauds associated with ICOs is the absconding of funds by the team behind the project. It’s technically called an “exit scam.”
An exit scam often involves creating a fake project website and whitepaper to promise investors enormous returns. These fraudsters take money from uninformed investors and leave them high and dry.

How To Protect Yourself from DeFi Scams
You probably want to know how to avoid falling victim to one of these scams. These tips will help you.
Do your research: Your priority should be to do this. Whenever you are considering a project, make sure you read up thoroughly on it. Identify the team’s background and the project’s roadmap, and gather as much information as you can.
Be careful of promises: Be very careful of any project that promises guaranteed returns. In the world of cryptocurrency, there are no guaranteed returns. Any project that tries to tell you otherwise is likely a scam.
Beware of social media: Social media is a great way to connect with people, but it can also be an excellent way for scammers to reach you. Be very skeptical if you see an advertisement for a project on social media. Be sure to do your research before investing in a project.
Keep your investments under your budget: This is a general investment rule, but it is essential in cryptocurrency. The market is highly volatile, and you could lose all your investment if you’re not careful.
Diversify your investments: It is not a good idea to invest all your money in one stock. When investing in cryptocurrency, diversify your investments to limit your risk.

Examples of Successful DeFi Scam Prosecutions
It was founded as an unregistered securities exchange operating EtherDelta by the US Securities and Exchange Commission (SEC) in 2019. ERC20 and Ethereum tokens can be swapped using EtherDelta, an Ethereum blockchain-based decentralized exchange. EtherDelta’s founder was accused by the SEC of operating the exchange as an unregistered broker-dealer, which provided illegal profits to the company. Approximately $13 million in ill-gotten gains must be disgorged by Coburn, with penalties of $300,000.
The CFTC was accused of a fraudulent virtual currency operation in 2020 against My Big Coin Pay, Inc. The My Big Coin Pay website promised investors the ability to trade virtual currency for products and services. According to allegations by the CFTC, investor funds were used for travel and luxury items.
In an order issued by the CFTC, My Big Coin Pay has been ordered to pay $6 million and to disgorge approximately $360,000 in gains. In recent years, there have been numerous successful prosecutions of DeFi scams. Law enforcement has taken action against DeFi scams. For legal advice, victims of DeFi scams should contact a lawyer.
Final Thought
While the DeFi space is full of opportunities, there are also several scams that you should be aware of. The most common scams include phishing scams, rug pulls, honeypot scams, and counterfeiting and forgery of digital assets scams. To protect yourself, it’s important to research and only invest in projects you trust.