5 Signs to Recognize a Legitimate DeFi Crypto Project

There are a lot of hackers and scammers out there, and the crypto realm isn’t an exception. There are also numerous legitimate crypto projects waiting for new users, and a lot of exciting opportunities to try and invest in, but we need to be cautious and do our research first.

In a previous piece, we talked about the signs you should be looking for in legitimate centralized services around cryptocurrencies. Now, we are going to explore some signs that could help us identify scams in decentralized systems, especially among Decentralized Finance (DeFi) platforms.

Unlike centralized platforms (mostly controlled by companies), these digital structures aren’t controlled by just one party, out of reach for its users. Instead, they work automatically, reigned by the code with which they were created, and maintained by their own communities of developers and users. Well, at least they are supposed to work this way.

However, someone did create them in the first place, and they could have packed some tricks and backdoors inside while doing it. To avoid losing our funds to them, we need to look for the right signs before investing.

Basic Checkup

We need to say that basic measures applied to check on centralized crypto projects can also apply to decentralized ones. First, examine the project's website and social media. Broken links and stolen images are a bad sign. A legitimate project has, ideally, a description of what the project is about, a FAQ section, an open-source code, a whitepaper, a roadmap if there’s also a team behind the project willing to maintain it in the future, and (if applicable) readily available smart contracts and token addresses. Also, a public team would be ideal. If these elements are missing or if the creators behind the project ask money for ‘finishing’ a ‘decentralized’ product or service, be cautious.

Reading the project's documents is crucial. The whitepaper should outline the project's goals, technology, and tokenomics in a clear and detailed manner. Be wary of vague technical details, excessive use of jargon or buzzwords, or unrealistic promises by creators that are looking for funding. Verify the originality of the whitepaper using plagiarism checkers and ensure the tokenomics section describes a fair distribution and clear utility.

Transparency and community comments are important too. The creators need to share the project’s addresses for everyone to see. Besides, even relatively new projects may have some reviews around in platforms like Bitcointalk or just the comment section on their social media and chain explorers. If the project has a team maintaining it, they should have active communities on forums and social media, and provide regular updates. Check for a history of security incidents, as a pattern of breaches or a lack of transparency about them should raise concerns.

Locked Liquidity

Locked liquidity in DeFi refers to the practice of securing liquidity provider (LP) tokens in a smart contract for a set period, ensuring that the liquidity—typically a pool of two tokens used for decentralized trading—can’t be withdrawn or tampered with during that time. This mechanism helps to provide stability of the token’s price, mitigating the risk of sudden market fluctuations caused by large-scale buying or selling, and prevents potential rug pulls where the creators might withdraw (steal) the investors’ funds from the pool.

That’s why new DeFi tokens usually offer locked liquidity (of course, only if there’s a team behind providing that liquidity in the first place). **This way, users can be assured that the team won’t withdraw the provided liquidity for their own malicious motives, at least during the set period.

Besides chain explorers (if they have liquidity sections),several tools can verify the status of locked liquidity, such as DEXTools and UNCX. These platforms allow users to check if a token's liquidity is securely locked, and even offer you a trust score, thus preventing potential deceptions. While this technique enhances trust, it's important to consider other factors when evaluating a project, as some scams might employ short-term locks to deceive investors temporarily.

Avoid Honeypots

Something seemingly profitable will attract your attention, and it could be a “honeypot” DeFi token. These tokens are designed to appear highly profitable, often luring investors with promises of substantial returns and rapid growth. However, the catch is that once purchased, these tokens trap the investors' funds, making it impossible to sell or trade them. The smart contracts behind honeypot tokens are cunningly programmed to lock in the investment, leaving buyers unable to retrieve their money.

To avoid falling victim to honeypot scams, utilizing a honeypot checker is essential. These tools analyze smart contracts to identify potential traps before you invest. One such tool is the Scanner by De.Fi, which supports over 40 different chains including Ethereum, Binance Smart Chain, and Polygon.

Another useful platform for detecting honeypots is DEXTools, which supports Ethereum and Binance Chain. By examining the buy and sell orders for a token, you can identify suspicious activity. For example, if there are no sell orders, it might indicate a honeypot. Additionally, consistently green candles on the chart across all timeframes suggest that no one has been able to sell the token or there are few real users.

Safe Smart Contracts

If you’re not a coder yourself, establishing if a smart contract is safe or not could be tricky. But you need to remember that the crypto world is a whole community, and others are likely doing the job for you already. It’s called a third-party audit. Independent auditors and review platforms like CertiK and ConsenSys thoroughly examine smart contracts to identify potential vulnerabilities, offering detailed reports that help investors make informed decisions.

It’d be ideal that the report goes beyond basic auditing by delving deep into the smart contract code and identifying bugs and vulnerabilities that could be exploited by scammers. For example, CertiK's dashboard provides rankings and scam alerts, allowing users to see which projects have been flagged. This proactive approach helps in identifying fraudulent projects early, such as when a scam token mimics popular names to deceive investors. Legitimate projects often show these third-party audit reports publicly on their websites.

On the other hand, free and user-friendly tools like De.Fi Scanner, Cyberscan, and CoinTool Audit Contract further empower users to conduct their own preliminary checks. By simply entering a smart contract address, users can quickly receive an initial audit to highlight potential risks. The third-party audits and audit tools collectively enhance the security of DeFi investments, making it easier for users to spot mostly safe smart contracts and (mostly) avoid potential scams.

However, take into account that such scanners aren’t magical, nor perfect. They can both miss something important and produce false alarms. So, add them to a whole research, considering other sources and tools as well.

Suspicious Activity

One of the key signs of a potentially dangerous DeFi project is suspicious activity associated with its contract address. If you notice unusual patterns, such as a lack of sell orders or transactions only coming from a few addresses, it could indicate that the project isn't as legitimate as it seems.

For instance, when most transactions originate from only a handful of wallet addresses, it can indicate potential manipulation or deceit. This centralized activity often suggests that the project is being controlled by a few individuals who may have intentions to manipulate the token's price or create an illusion of high demand and activity.

To check for these red flags, you'll mainly need chain explorers and DeFi analysis tools, like DEXTools. Chain explorers, such as Etherscan for Ethereum or the Obyte Explorer (they vary from chain to chain), allow you to see all transactions related to a contract or token address —if the coin isn’t private, like Blackbytes. Look for a healthy mix of buy and sell orders and a variety of unique wallet addresses participating. If the activity seems one-sided or concentrated in a few wallets, that’s a warning sign.

Bonus: Decentralization Levels

DeFi platforms are often built inside a main ledger, like Ethereum or Obyte. The truth is that their decentralization and resistance to censorship and external control will depend largely on those characteristics already being present in the main ledger. Obyte, for instance, is a ledger without middlemen, which means that most of the available features and decentralized applications (Dapps) can be used without another human controlling or supervising things backstage. Everything is done by the code itself.

Despite this, its team and developers aren’t anonymous, and very clear terms, conditions, and legal sections (for the wallet and Obyte Foundation, not the decentralized network) are available on the official website. Of course, a detailed whitepaper is also there, a bug bounty program, and even an initial announcement and discussion on Bitcointalk.

Additionally, we can say that Obyte's active and engaged community in social media, transparent development roadmap and updates, and commitment to open-source principles further underscore its legitimacy as a project with genuine utility and long-term viability in the ever-evolving landscape of decentralized technologies.

Obyte's ecosystem encompasses a diverse range of Dapps and smart contracts that leverage its robust platform for various use cases, including decentralized finance (DeFi), peer-to-peer (P2P) messaging, and asset tokenization. These practical applications demonstrate Obyte's versatility and potential to disrupt multiple industries by enabling secure, transparent, and unstoppable transfer of value without the need for intermediaries or potential worries about its legitimacy.

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