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DeFi Farm 103: Scams

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If you have been following RugDoc’s Twitter or Telegram group, chances are big that you have noticed the amount of DeFi scams that are pulled off. In this DeFi Farm 103 guide we will explain which DeFi (farm) scams you should watch out for and how you can decrease the risks of getting scammed.

DeFi Scams #

A scam in DeFi is occurs when a malicious group or individual manages to steal your assets by using malicious smart contracts (such as hard rugs) or by dumping the price of their token by suddenly selling huge amounts of them (soft rugs). DeFi scams can be devided into 2 categories:

Farm scams

These types of scams typically happen in farming or liquidity pools designed by malicious developers in order to steal your assets. Farm scams are pulled off by letting unknowing investors interact with the malicious developers’ masterchef smart contracts. Usually such masterchef contracts contain function such as a migrator to an external wallet and no timelock. With inbuilt features like the aforementioned migrators, developers can drain their smart contract at any time, stealing all your funds. This scam is called a rug-pull. You can read more about how to check masterchef contracts for malicious features here.

Another common scam is the soft rug. These types of rugs are harder to find out, as developers tend to first earn a lot of trust from the community before executing this scam. Soft rugs are performed when a group (of developers) hold a big amount of a token and decide to sell everything at once, resulting in the price of the token crashing down. This action leaves other investors with worthless tokens, and thus big losses.

Person scams

Person scams are usually performed by requesting investors to fill in specific forms with sensitive information such as private keys and seed phrases. By doing so, scammers are able to fully take control of the wallet and proceed to send all the assets to their own wallet. Please note: Never share your private keys or seed phrase with anyone, not even trusted parties.

Another frequently used scam is that the investor is requested via their web3 wallet, in order to buy a token, to give unlimited permission to their smart contract. Once done, even if the investor has managed to retrieve his assets from the farm-/liquidity pool, the scammer is still able to drain the web3 wallet of the investor because of his unlimited permissions. If you want to learn more about revoking smart contract permissions, click here.

Investing in DeFi: What to look out for #

Prior to investing into a DeFi farm- or liquidity pool, it is wise to conduct some research to verify if the platform and/or its pools are legit.

Whenever you come across a pool of interested, make sure you perform the following steps:

  1. Is the defi-protocol legit? Check our website Rugdoc.io to find out if the website has been reviewed by our team. Based on our risk rating, you’ll have some idea whether the masterchef contract doesn’t contain any exploits, who the token owner is, whether there are one or multiple token holders, if there’s an anti-whale function in place, if the masterchef has a timelock and if the token-fees are safe.
  2. Is the team behind the protocol or token known? Make sure to check whether the team is anonymous, if they have social media and if they have a Telegram group you can join to ask them questions.
  3. Are the smart contracts of the protocol audited? Before continuing, make sure you check whether the smart contracts of the protocol have been audited (by a legit company). Malicious protocols tend to put fake audited badges on their websites in order to gain trust of new investors. Make sure you check with the auditing company whether a badge is legit or not. You can read more about smart contract audits and rugdoc reviews here.

Conclusion #

Due to DeFi being permissionless, the amount of scams have increased drastically. However, If you know what to look out for, you can reduce most of the risks. By sticking to more popular DeFi protocols such as Pancakeswap or Sushiswap and popular tokens such as ETH, BNB, BUSD, BTCB or Cake, you can get used to the DeFi space without high chances to get scammed.

Updated on September 5, 2021

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Disclaimer: This is done with our best knowledge and effort, nothing can be known for certain – always DYOR and risk management. This is NOT financial advice. Use the information presented here to inform your own decisions. Referral links may be included on any outbound link.

  • What do the risk ratings mean?

Our mission here at RugDoc is to screen for hard rug code that results in 100% theft of ALL underlying funds for ALL participants.

This is the ONE part of the due diligence process that most people cannot simply do on their own as it costs thousands of dollars to hire a senior solidity developer to look over a farm for safety.

A project coin with terrible code can go up in price, and a project with good code and a good team can also go down in price.

Do NOT use our ratings to refer to your likelihood in making money if you invest in the project. They are ONLY in reference to code safety.

Everything else beyond code safety is YOUR responsibility to go do research on. We just make sure the casino you’re betting in won’t rob you before you even get to place a bet.

Our reviews for projects are organized into a few colors.

🟢 Least Risk
These projects are the least likely to hard or soft rug. Usually reserved for cornerstone projects of an ecosystem where it makes no financial sense for them to rug in any manner as they make more money just being legit.

🔵 Low Risk
These projects are usually established projects in an ecosystem that have a track record of success or have KYC’d to us or other authoritative sources in the real world. As a result, it is extremely unlikely for them to soft rug or hard rug their projects. The projects can still fail and the token price can go down, but usually more as a result of natural market forces.

⚪️ Some Risk
This is the default rating for projects with unknown teams but have code that is unlikely to have hard rug risk. Since the team is unknown and doesn’t have a track record of success, it’s entirely possible that they may try to soft rug by dumping tokens, abandoning the project, etc. Even a last minute contract swap to a malicious contract is possible. The only thing that is unlikely is a complete hard rug as long as you are 100% sure you deposit into the contract we review.

🟠 Medium Risk
Similar to Some Risk, but the underlying code itself is custom enough or complex enough that it warrants an elevated risk rating that needs deeper research. Make sure you read every point presented to make sure you’re comfortable with that before entering. Still unlikely to hard rug, but more chances of custom code behaving incorrectly and causing other issues.

🔴 High Risk
Project contains code or practices that are HIGHLY LIKELY to lead to catastrophic losses as they are right now. Make sure you read the description carefully as we will always warn what these issues are. If you see the words Hard Rug anywhere in the review, STAY FAR AWAY!

⚫️ Not Eligible
We reserve the right to not review exceedingly complex projects that would require tens of thousands of dollars of senior security analyst man hours. Typically these are projects that deal with leverage, lending, options, derivatives, and anything that is overly complex and which requires tons of peer reviews and audits from top audit companies.

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  • How can I request for an update to my review?

🟢 For owners who have made impactful changes and would like an update to their farm review:

1️⃣ Use #update at @RugDocChat with your description and proof of changes and it will be forwarded to our scanners.

2️⃣ This does not guarantee a change in your review.

3️⃣ Owners who have difficulty solving the issues can consider our Consultation Package - please contact @BaymaxCrypto on Telegram to discuss.