Securing Funds in the Dangerous World of DeFi
Decentralized finance (DeFi) is one of the most rapidly expanding areas in crypto. As of October 2022, the total value locked in DeFi is around $55 billion.
What makes DeFi so prosperous is also risky. DeFi is available for anyone with an internet connection, meaning the non-crypto-literate can lose money through errors. And anyone can fall prey to scams and exploits.
A 2021 study from the Beijing University of Posts and Telecommunications found that 50% of tokens listed on the Uniswap DeFi protocol were scams.
How to Secure your Funds in DeFi
In the spirit of reducing risk, here are some general “do’s and don’ts” to keep you secure on your DeFi journey:
1. Do not share your private key
Never share your wallet’s private key with anyone, even if it is an admin of a group or project team member. Your private key is the only thing someone needs to steal your tokens.
This, of course, requires understanding the difference between private and public keys. Anyone with access to your private key can move your funds away from your wallet.
2. Always store your significant funds in a hardware wallet / offline.
By storing your funds offline, thieves and hackers cannot access your funds. A hardware wallet (like Ledger or Trezor) requires a physical presence to move assets.
A cold wallet is always the best when holding your funds for an extended period. Even centralized exchanges used cold wallets to prevent hackers from gaining access to their funds.
3. Never visit the website link of a randomly airdropped token.
Only interact with reputable and time-tested projects. Click unknown links can make you vulnerable to hackers, and it can lead to the hackers having access to your wallet.
4. Do your own research (DYOR)
Know what you are buying/selling, and ensure the token/contract you are interacting with isn’t a scam. This is very important while dealing with any Defi project because 95% of tokens on Uniswap are created by scammers trying to milk the funds of innocent people.
To protect yourself, constantly research yourself. Don’t allow social media influencers to research for you because, most times, their research might need to be more accurate.
5. Enable multi-factor authentication for all wallets and accounts.
In this Defi space where hackers are emerging with new strategies to steal people’s funds, it is necessary to have two or 3-factor authentications for your wallet.
Having Multi-factor authentication will make it difficult for hackers to steal the funds in your wallet.
6. Avoid Scam airdrops
Airdrops, when protocols distribute free tokens to members of their communities, are common in crypto. But not all tokens airdropped to your wallet are genuine.
A recent DeFi scam, widespread on the Binance Smart Chain, tricks people into thinking they have suddenly received tokens worth thousands of dollars. But they aren’t tradable on exchanges as there’s no liquidity.
In most instances, these tokens will be named after a shady website. If you connect your wallet through that website and approve access to a malicious smart contract, scammers can siphon funds directly from your wallet.
7. Avoid Celebrity endorsed project
Paris Hilton, DJ Khaled, and Floyd Mayweather have all posted on Instagram or Twitter to promote an Initial Coin Offering that turned out to be fraudulent.
Jamie Foxx posted about the coin Cobinhood, which was audited and shut down three years later. Just because your favourite celebrity mentions it online does not make it a safe business venture.
8. Be careful of anonymous founders
The world of crypto is deep-seated in the freedom of anonymity (and pseudonymity) that the Internet can provide.
Anonymous founders still pose an additional risk you need to consider. If they turn out to be scammers, there’s a good chance they can’t be held accountable. While on-chain analysis tools are getting more and more sophisticated, it’s still different if the founders have a reputation at stake that’s tied to their real-world identity.
Bottom line
The industry is also very young, and bad actors are looking to exploit new investors due to their lack of technical knowledge.
Carefully following all the safety measures stated above will go a long way in helping you to secure your funds while going through the jungle of Defi.
