In Part I of this series, we discussed the basics of DeFi investment opportunities, specifically decentralized lending and borrowing. We also touched on yield farming, the trending DeFi investment opportunity in the decentralized world right now. This section will address the Do’s of investing in DeFi. Without much ado, welcome to this life-changing session!
The Do’s of Investing in DeFi
Here is what you need to master before venturing into the DeFi world.
Carry Out Due Diligence Always
I am pretty sure you cannot buy a used car without a mechanic by your side, or instead buy medicine without a doctor’s prescription. Similarly, you need to check what is going on under the hood before investing in a DeFi project.
When you are not 100% sure about a particular project, the first way to confirm whether it is a real thing or a scam is to google its name followed by the word’ scam.’ If it is a scam, there are high chances you will not be the first person to discover that, and you will probably find useful testimonials from ‘scammed investors.’ The information will serve as a precaution; hence, you won’t lose your hard-earned money.
Verify the Security of a Project’s Smart Contracts
The second way of evaluating a DeFi project’s authenticity is to see what trusted security experts say about it. No matter how the team behind the project may be, projects that prioritize security over profits subject their smart contracts to manual security audits from trusted security firms such as Certik, Quantstamp, OpenZeppelin, and others.
Besides searching for security audits, checking what others say, and even the experience of team members themselves on LinkedIn and what they say about their project on channels like their blog, telegram channels, Twitter, Facebook, and Reddit forums can offer valuable insights into the credibility and potential of the project.
Check Whether the Contract is Verified on Etherscan
Projects that have verified their smart contracts on Etherscan have essentially shown that the code you get when viewing a contract is the same code you will obtain when using it. However, a verified smart contract does not imply that it does not have any vulnerability or is not a scam. It simply means that the code can be publicly be examined without fear of it being manipulated in some degenerate ways.
Etherscan also provides a service known as ETHProtect, which permits users to report mistrustful and falsified activities on the Ethereum network. Reports of fraudulent activities are reviewed by Etherscan’s security experts and their Taint Inference Analysis Engine. Addresses confirmed to be participating in malicious activities are shielded red to signal that the address has some question marks.
Watch out for the Old Baits and Switch
Though most DEXs permit users to trade ERC20 tokens using their smart contracts, only a few of them try to hide those tokens from their website displays. Many DeFi projects issue ERC20 tokens to back their operations. Still, behind these tokens are numerous shitcoins and scam tokens striving to entice investors who want to buy tokens in their early stages. They are ready to invest without carrying out due diligence on the offerings.
Most scammers come up with token names that appeal well to investors, like DeFi token or CannabisCoin. Investors aiming to venture into DeFi investment can easily be forgiven for thinking that DEFI token might be a DeFi index of sorts.
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