In any new industry, there are bound to be pioneers who blaze the trail and help define the landscape. The Decentralized Finance (DeFi) space is no different. But as we learn and grow, it’s important to remember the mistakes of the past.
We’ve all heard of DeFi protocols that have scammed their investors in various ways (rugging, locking funds, etc.). When this happens, it hurts the entire DeFi industry as it causes increased mistrust and lowers the overall sentiment of investors in the space. In this article, we’ll discuss four key tips for staying safe in DeFi protocols.
One of the most important things to avoid in DeFi protocols is centralization. When a protocol is centralized, investors are placing their trust in whoever has control of the funds or contracts. This goes against all principles of decentralized finance!
Before investing into a DeFi protocol, check to make sure everything is truly run in a decentralized way. For example, all funds and crypto invested should always be verifiable directly on a blockchain. A great example of this is how BOMB Money will always have its investments verifiable directly on BOMB Chain, a truly decentralized solution!
Avoid Anonymous Teams
Another sign you should avoid a DeFi protocol is if it is run by an anonymous team. Most of the time if a team is entirely anonymous, they do not have the investors’ best interests at heart. In fact, most anonymous teams jump from project-to-project scamming people with the same formula over and over again, contributing to the increasing mistrust in DeFi.
Just because a protocol is decentralized does not mean its team needs to be anonymous. If the project is legitimate and has only good intentions, its leadership team should not only be fully doxxed, but should also have regular engagement with their investors. Before investing, make sure the protocol’s leadership team engages with its investors at least once a week. The more transparency and frequency in communication, the better!
Avoid Protocols That Can Pause Transactions
If an admin has the ability to pause a protocol, you should avoid it at all costs!
Some protocols may defend their ability to pause by saying they would only use it in the case of an attack or if they found some issue within their smart contract. However, giving anyone the power to pause a protocol opens up the very real possibility that they can freeze your funds permanently. If they can pause, they don’t necessarily ever need to unpause!
A better solution than pausing is for a protocol to use battle-tested code with regular audits both internally and externally. For example, all of BOMB Money’s code are forks of code that have handled billions of dollars in assets for multiple years. If there were exploits to be had, hackers would have found them by now when there is that much money at stake. Using battle-tested code is always a much better solution than pausing transactions. Avoid the pause at all cost!
Finally, avoid blacklists. A blacklist is a list of addresses that are not allowed to interact with the protocol. This may seem like a good way to keep “bad actors” out, but it can also be used to censor people who are trying to use the protocol for legitimate purposes. It’s important to strike a balance between security and censorship, and blacklists often tip the scales too far in the way of censorship.
As the DeFi space continues to grow, we’re sure to learn more about what works and what doesn’t. But by avoiding these four things, we can help build a more stable and secure future for DeFi!