With over hundreds of DeFi protocols in the crypto ecosystem, it is easy for an investor to be overwhelmed and difficult to verify the safety of their chosen product. Furthermore, unless you are technical expert in DeFi yourself and able to parse through its smart contract codes, most investors have little tools to perform due diligence on DeFi protocols.
But fear not! We at Coinomo offer a few tips for savvy investors in how to perform due diligence on DeFi projects, hopefully mitigating the risk as much as possible when investing.
1. Team, Team and Team
The decentralized nature of the crypto ecosystem means that any entity can launch a DeFi protocol. Treat investing in DeFi just as you would an early-stage, angel start-up. Ask yourself these questions:
- Who launched the crypto product? Is the team well-known in the crypto world? What is their track record? Do they have similar successful launches?
- Are there any institutional backing behind the team? If so, are these institutions well-known?
2. Beware the Rugpull
The nightmare of every crypto investor is the rugpull, where developers abandon a project and run away with investor-provided liquidity pool. Many crypto critics have long attributed the lawlessness of the crypto ecosystem to the rugpull. To increase your chances of avoiding a rugpull, look for these indicators:
- Check the social media presence of the project. Is the marketing done professionally with solid consumer engagement? Are the profiles following the project’s twitter handle suspect?
- Again, refer back to point 1. Who are the developers? Is the project anonymous?
3. Check Your Hype
Insane returns, high network traffic, large marketing campaign and even celebrity endorsements? Surely it’s legit…right?
Nope. Even projects with A-list celebrity endorsements can be disingenuous. Be very careful in investing in a project without checking the aforementioned fundamentals, if it sounds too good to be true, it may very well be.
If you have already invested in a less convincing project. Consider immediately withdrawing your money and pocket what returns while you still can before the scam occurs.
4. Fund Safety
Any crypto team worth their salt will put paramount importance on investor fund safety in their project. Crypto-investors should be
mindful of the following:
- Who provides custodian services to the product? Is the vault service provider an accredited institution proven resistant to tampering?
- What sort of wallet service does the project provide? It is suggested for investors to secure their money in a commonly used, well-known wallet provider.
5. Code Audits and Public Releases
Every DeFi project comes with smart contracts. Unless you are an expert in deciphering blockchain coding, you should be mindful of the following:
- Has the team made their smart contract code publicly available? If so, has it been audited by public consensus?
- Some teams will not publish their smart contract due to competition, while this is understandable and not a cause for concern in itself, has the code been auditing by an accredited third party?
Again, fall back to point 1. If a team has not released their code to the public, then look for other indicators whether they are trustworthy developers. If the smart contract is private, and the team behind it is anonymous, then it is a cause for concern.
We at Coinomo hope that every crypto investors can make sound decisions through performing due diligence. Feel free to download Coinomo at coinomo.com to invest in DeFi protocols that have been pre-vetted, fully verified and code-audited.
Thank you for choosing Coinomo as your gateway into crypto.