The defi craze is bringing life back to the crypto space with new projects showing up almost on a daily basis. Some are relating this defi boom to the ICO bubble of 2017 which has left many at a loss.
As defi is still in its infancy stage, it is important to do your research before jumping into any new project. While there are many factors that contribute to a token’s success, there are also many red flags to look out for and many of them seem to remain consistent with the ICO bubble of 2017. We have in this article a list of common red flags one may be able to spot if they do their due diligence. While a project with one or more of these red flags does not mean it is a scam or it will fail, the risk is elevated and one must check in further details when doing due diligence before making an informed decision.
Anonymous Teams
Photocredits: Pexels – Anonymous
The blockchain space is one of the few spaces where users tolerate anonymous teams.
Like the ICO bubble of 2017, the 2020 defi craze has brought about many yield farms with anonymous teams. While some projects have legitmate reasons for anonymity (eg. The dapp is designed to help people in restricted countries), some projects choose the path of anonymity for mal intent such as a pump and dump.
In projects with a known team, at least you know their backgrounds and their expertise and the development team will be held accountable for their actions. With anonymous teams, the development team has little or no consequences for exit scamming.
However, even with known teams, there’s no guarantee there will be protection. Take the case for the hack of Mt. Gox exchange in 2014, despite the fact the founder is known and the company is going through bankruptcy procedures, most of the victims are still waiting for their refunds.
It is also important to note that aside from Bitcoin, most of the top 20 coins have known founders and development teams and expecting this new anonymous team ICO you are planning on joining in to become big is unrealistic.
Anyone planning on entering a project with anonymous teams should plan out far ahead when they should exit to minimize risks.
Unclear Whitepapers
The white paper is the core of a project’s intention and road map. While these whitepapers are lengthy, it can tell you a lot about the project. From team backgrounds to tokenomics and road maps, one can get a good picture of how much work has been put into this project and how far could this project go. While there’s no guarantee the project will succeed, a good white paper shows that the team has put a lot of thoughts into this project.
If a project lacks a whitepaper, has an unclear whitepaper or plagiarizes another project’s whitepaper, it is a clear caution sign for investors to investigate further or steer clear of the project. While we have seen some projects with plagiarized white paper doing fine like Tron, most projects with plagiarized white paper tend to be copycat projects and the development team behind it may not intend to stay for the long haul.
Unfortunately many invest in projects without reading the white paper and this has brought on many surprises and regrets later on.
No mentions of Developer pool lockup or no release schedule
Photo credits: Pexels – Lock Safe
The smart crypt investor would always check the tokenomics to understand the distribution of the tokens. One of the most important aspect is to see how much of the tokens the developer + early investor team retain and how they’re released. A major dump from the developer may affect the price significantly and spook other token holders to dump, causing a domino effect.
Developer pool lockup feature builds trust as it communicates to the community that the development team is planning on being around for the long haul. As many understand that the development team has costs (eg. Contract audit, marketing etc…), some projects are transparent and provide a token release schedule (eg. Monthly release of 5% of dev shares).
If there’s no mentions of a developer pool lockup period and the developers are avoiding questions regarding it through private communication (telegram, email or twitter), one may want to be cautious as the risks of a dump is possible. It is also important to note that some development teams do prefer to have flexible release schedule to address the needs of the development team.
Conclusion:
At the end of the day it comes down to what your risk tolerance level is and whether you are comfortable entering a project where the risk of a dump is prevalent.
The crypto space is still in its early stages and there will always be risks when investing in new crypto projects. While finding the next ‘moon project’ is like finding a needle in a hay stack, being able to tell these red flags in projects can help you assess potential hazards and risks before you jump into these projects. This article shows you some of the many red flags to look out for, this is not an exhaustive list and it is always important to be on your guard as you evaluate different projects before getting into new projects.
We wish all the best with your crypto defi and investment journey.