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How to find legitimate DeFi projects and spot scams

As the DeFi industry continues to break barriers with each new innovative project, it can be daunting to figure out which are legitimate projects. In 2021 alone, the crypto space was crippled by over $10 billion from scams and hacks. It’s not a reason to exit or avoid it entirely because the pros still outweigh the cons.

This guide will help you navigate your way in looking for good crypto projects in the DeFi space.

  1. Check the project’s website and ask the crypto community Sometimes, the look of the website alone is telling. But more importantly, look for information such as founders and officers — do they have reputable backgrounds? Read the whitepaper and scrutinize the product being offered. Are your rights specified as a token holder? Does it have a strong community of active members on social media? Ask your fellow Redditor or check for security risks among your trusted contacts who are in the same space.

  2. Check for the supply through Total Value Locked (TVL) Total Locked Value (TVL) represents the value of the assets locked in the platform. Simply put, it is representative of the protocol’s overall health. To get the TVL ratio, divide the market capitalization by the TVL. A TVL ratio of below 1 means the asset is undervalued and may be worth investing in. There are highly popular tokens, such as Dogecoin and Shiba Inu, but are comparable to penny stocks with no real use case.

  3. Know the Annual Yield from staking The annual yield from staking varies from one cryptocurrency to another. As DeFi projects gain more popularity, yields tend to decrease. Avoid assets that overpromise high yields without an extensive history of improvements.s. A high annual yield can be a good indicator of an undervalued token.

  4. Analyze the token movements on exchanges This provides important data of impending whale action, which will affect investment value for the ordinary investor and trader. Large-scale movements can be a potential signal for big withdrawals that affect the stability of the token price.

  5. Unique address exponential growth may not be so good The growth of unique addresses is a good indicator of an asset’s growing popularity. It may even be a sign of a breakout. However, keep in mind that this can be manipulated, like when a project airdrops tokens to quickly increase unique addresses. Be wary of emotional investing, or investing because of the Fear of Missing Out (“FOMO”), just because a token is gaining popularity over a short-term period.

  6. Are the allocations and distributions sound? Token economics or “Tokenomics” is the understanding of the aspects controlling demand and supply of tokens. There are many projects out there promising great returns but with the majority of the holdings allocated to the founder and a few wallets. If this is the case, and a huge portion of the overall supply is dumped, the value of the token also plummets. Do you know how the sale of the token is distributed? Was it done through an exclusive pre-sale, an initial coin offering, or was it done via an airdrop on social media?

  7. Pay attention to the product’s development activities While development activities can also be gamed, it’s still a good metric when looking for legitimate DeFi projects out there. The great thing about blockchain is that it’s open-source and anybody can look into the code and check for malicious activities. With enough interest, more people will be able to check the activities happening around the project and see the weight of these actions in creating a better project.

In conclusion, there are various ways to look for the legitimacy of DeFi projects and you could prevent yourself from being scammed. It may be difficult at first for beginners in the crypto space, but it’s better to read and look out for signs to make better investment decisions. As with any form of offer, remember that if it’s too good to be true, it’s probably not.

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