Bitcoin SV creator Craig Wright, recently made it clear that he considers all DeFi projects nothing more than scams. Moreover, whether you love or hate Craig Wright, it is an inescapable fact that scam DeFi projects are on the rise.
Recently, words like ‘DeFi’ and ‘Yield Farming’ have created a buzz among crypto investors. However, many investors don’t know what these words really mean. As a result, scam DeFi projects are coming to market, with the sole purpose of duping investors.
How to Spot Scam DeFi Projects
Is a DeFi project you are considering investing in a scam? As it stands, one of the easiest ways to tell is by checking to see if it is a clone of an existing project.
Like with decentralized cryptocurrencies like Bitcoin, decentralized finance (DeFi) coins are built on opensource source code. This ensures that third parties can easily (and transparently) check code for bugs. However, this also means that malicious third parties can clone, recycle, and reuse code themselves.
- Recently, code used in the alleged scam DeFi project Yuno Finance, was cloned to create a new DeFi project, Kimchi.
- Despite some alleging that Kimchi is also a scam, investor hype saw Kimchi achieve a $31,605,187 marketcap within 24-hours of launching.
- Kimchi is based on code from Yuno Finance. However, Yuno Finance originally sourced its code from the alledged exit scam DeFi project, Sushi. This makes Kimchi a clone of a clone, of a clone.
At present, Kimchi has an estimated marketcap of $27 million. It may also be the case that Kimchi is a legitimate DeFi project. However, if this is the case, it is worth questioning why they made no effort to create their own coin or D’App.
Sadly, detecting cloned software isn’t something most cryptocurrency investors will be capable of. However, in the case of Kimchi, it took just 24-hours after launch for news to break that the DeFi project is a clone. This being the case, never invest in projects before researching projects independently in-depth.
Beware of Fake DeFi Token Listings on Uniswap
At present, one of the most popular DeFi projects on the market is Uniswap. As a decentralized exchange, Uniswap makes it possible to trade cryptocurrency without KYC verification. Even better, Uniswap makes it possible to add coins you own to the Uniswap liquidity pool and passively earn fees every time coins are traded.
Sadly, as Uniswap is decentralized and permissionless, Uniswap also has an open-door policy for new coin listings. This means that anyone can create and list a new coin on Uniswap in a matter of hours.
- In mid-August, blockchain software firm ConsenSys made a joke on Twitter about how easy it is to create new DeFi coins.
- Within 24-hours, ConsenSys created a fake coin called Meme DAO.
- Within 6-hours, Meme DAO was already trading at over $66.
Because of how easy it is to launch new DeFi coins, people who invest in DeFi projects must separate themselves from the hype surrounding new coins. The same rule applies to when investing in supposedly legitimate DeFi projets.
Are DeFi Projects or Coins Really Worth Investing In?
Make no mistake. Even meme coins like Meme DAO can net investors a profit if they invest in coins and exit markets early enough. However, if you are a retail investor, it is unlikely that you will time market exits quickly enough.
This rule is also true for top trending DeFi tokens like COMP by Compound and YFI by Yearn Finance. This is because most reputable DeFi coins have no intrinsic value. Most are simply governance tokens which allow holders to vote on how projects will develop.
Having no intrinsic value is why even the creators of coins like YFI have called out YFI reaching over $30,000 in value as absurd. By comparison, though, DeFi projects like Chainlink, and Kyber Network (KNC) do offer coins which have real utility value.
What are the Best DeFi Projects so far in 2020?
As a rule, any DeFi projects that people see receiving lots of sudden hype on social media are probably scam projects. However, reputable DeFi projects do exist. Currently, these include:
- REN – A DeFi project that uses a virtual machine to provide liquidity and interoperability across different blockchains.
- KAVA – A DeFi project looking to expand ETH-based DeFi projects and lending across different blockchains.
- Melon – A fully decentralized asset management fund protocol
- DMM – A DeFi protocol that allows people to earn interest on-chain, from real-world investment assets.
- UMA – A decentralized financial contracts platform that enables the execution of financial contracts anywhere in the world, hence the name of the project being Universal Market Access.
Even in the above cases, though, it is important to be wary of coins that suddenly explode in value. If this happens, and you are already invested, exit the market quickly. If not, avoid coins that are exploding in value unless you are sure that price gains will continue until you are sure you can exit markets safely and in profit.