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6 Simple Steps To Avoid Scam Tokens in DeFi

There are nearly 8000 different cryptocurrencies on the market, with new ones popping up nearly every week. While some active traders might be attracted by crypto’s volatility with little attention to the long term prospects of a coin, it is still incredibly important to ‘do your own research’ and study the project behind a token before getting into the game.

Bitcoin has matured a lot and has earned the trust of even institutional investors such as Paul Tudor Jones, but such a degree of legitimacy does not yet exist in the DeFi space. Of course, Ethereum is a respected crypto asset, but the DeFi space as a whole is still in its early stages, and while there are some high quality projects active in the space, there are also plenty of efforts out there to scam investors.

In this post, we want to outline a few simple steps you can take to mitigate risk before committing to a new token.

1. Consider the goal of the project 

Too many projects simply copy code and launch a token without adding real value to the DeFi space. When you consider a new token, find out what the project is trying to achieve and if you believe this is something that will actually bring the space forward. Crypto is among the fastest growing asset classes, boasting ongoing innovation, and as you consider such innovations it’s useful to place developments in a certain timeframe. Do you see the project play the long game, or is it just a short-lived hype? 

2. Find out more about the founders 

Bitcoin’s founder is unknown. This adds to the power of the coin and there are plenty of reasons why the anonymity or disengagement of a founder can be a good thing, from a community perspective. But overall, we suggest that it’s important to learn about who is behind the project, their credentials, intentions, how they engage the media and their reputation in the industry. 

3. Study the code 

Part of what makes the crypto space appealing is that it is open-source and permissionless. Meaning, anyone can start a project or participate. If you are unable to assess the quality of the underlying protocol or the specifics of a smart contract, then get a sense of what other developers and experts are saying about it. Additionally, it’s helpful to see if the project undergoes frequent updates and improvements. 

 4. Get a sense of token distribution 

Knowledge of tokenomics is a must for anyone who is intent on participating in DeFi. Find out what mechanisms are in place to drive the value of the coin, how it is mined, and how much of the coin is in circulation. It’s important to know to what extent the token is distributed and how that distribution has taken place – through private sales, on spot markets, airdrops etc. A general rule is that the more a token is distributed, the less likely it is to be manipulated. 

5. Find out what the experts are saying 

External smart contract audits are increasingly common, as they provide a way for projects to assure investors of the quality of its product. It is important to remember, however, that audits do not guarantee the success of a project or that smart contracts are without risk. 

 6. Diversify 

If you do decide to participate in a certain project or trade DeFi tokens, we strongly suggest that you distribute your funds across different smart contracts and tokens, rather than betting on a single project. If you’re looking to invest in DeFi, at AAX we offer a variety of DeFi tokens including ChainLink, Bancor Network Token, Compound and Aave. AAX also offers DeFi futures contracts which enable investors to take up highly leveraged short positions and hedge against risk. 

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