A self-described “doctor” has a lesson she would like to teach investors about decentralized finance (DeFi), an increasingly popular lending industry that has become a battleground against cryptocurrency-related fraud.
Even the most experienced DeFi gamers can find themselves caught off guard by hacks and scams. Yet retail investors in the industry are hungry for basic fraud protection, giving rise to a new generation of “vigilantes” and startup businesses to meet demand.
Over a year ago, a Silicon Vally couple lost around $ 200,000 to a DeFi scam. Under the online alias of “The Rug Doctor,” his wife – who spoke to Yahoo Finance on condition of anonymity – now runs a cryptocurrency valuation firm that she warns when new projects could scam investors blinded by the promise of big returns.
In late 2020, a friend introduced the couple to DeFi, who had invested in cryptocurrency years earlier, and they quickly found DeFi compelling. The product offered variations on cryptocurrency lending where investors could reap returns anywhere between 50-300% APY.
Intoxicated by the gains from “staking” cryptocurrencies with the protocols, the couple quickly bit and eventually discovered MoltenSwap, a project that promised an extravagant 3,000% annual percentage return (APY).
“My husband immediately moved all in, six figures of his money. He was scammed immediately and lost about $ 200,000. He was awful, “the Rug Doctor told Yahoo Finance over the phone. His pseudonym is a pun where cryptocurrency developers lure investors, just to” pull the carpet “and save with money.
Whether due to the high yield fixation or hoping that they could somehow recover the funds, the couple refused to leave DeFi. For several weeks, the Rug Doctor has been delving into the arcane details of smart contracts and educating herself on how they actually work.
At the peak in November, the market capitalization of all DeFi tokens comprised just under 6% of the total cryptocurrency market. But that belied breathtaking growth in the cryptocurrency segment, which has unnerved some regulators.
According to research firm Fundstrat, the market capitalization of DeFi coins increased from $ 1.7 billion to $ 170 billion in 2021, with capital flowing into DeFi protocols from May 2020 to the end of 2021, skyrocketing. from $ 1 billion to $ 250 billion.
By leveraging blockchain-based smart contracts, “DeFi strives to create a more accessible, efficient and transparent financial system,” Fundstrat wrote in a recent report.
Getting smart with smart contracts
By learning a programming language called Solidity, which is used in most smart contracts, Rug Doctor found that she could actually evaluate projects in ways similar to auditing a company’s financial statements. Drawing on the programming experience of her PhD program, she has learned for herself how to review smart contracts.
She started reviewing a project’s smart contracts before she and her husband earmarked their funds and found a lot of scams. This prompted her to start posting reviews of her on social media, and the free content took off quickly – by the end of the summer of 2021, the Rug Doctor review had morphed into a comprehensive business model.
While I can’t say that a project I have allowed to advertise on the platform will do well, I can at least be pretty sure it won’t harm users, which users appreciate.The carpet doctor
The company now employs 30 people around the world, including a number of undergraduate students based in Malyasia, a communications professional in London, and a grandmother living in Thailand.
Eight Rug Doctor employees work full-time reviewing smart contracts and assign a “risk assessment” to how likely a given protocol is to “pull the carpet” to its investors. They also perform basic Know Your Customer (KYC) checks on each project team.
The company offers a basic risk mitigation resource for investors looking to avoid scams, but monetize website traffic by offering advertisements to vetted projects.
Positive reviews or “badges” may still be captured by illegitimate projects, but hundreds of investors use Rug Doctor’s research. When they unfairly capture a project using a “Rug Docs reviewed” badge, they notify the company, which will mark the project as an unverified investment.
Newer investors may not be as connected as older ones, but the founder said Rug Docs still offers one of the best free scam protection alternatives on the market.
“While I can’t say that a project I let advertise on the platform will do well, I can at least be pretty sure it won’t harm users, which users appreciate,” the Rug Doctor told Yahoo Finance.
While hackable software vulnerabilities can pose hidden but costly risks to even the most knowledgeable DeFi teams, retail investors within the space are also seeking basic fraud protection, and a number of alias vigilantes and taxpaying firms have been born to satisfy. the question.
‘Attracted to high returns’
With the take-off of cryptocurrency products, efforts are intensifying to reduce the money that online scammers are able to squeeze out of unsuspecting investors. Regulators and people like Rug Doctor have tried to warn intoxicated investors of high yields, but in the volatile and opaque cryptocurrency markets, it’s impossible to catch every scam.
In particular, DeFi has come under the crosshairs of Securities and Exchange Commission President Gary Gensler, who has vowed to protect investors and hold companies accountable for what they are selling. Recently, the SEC announced that cryptocurrency firm BlockFi paid $ 100 million to settle allegations about high-yielding interest-bearing products.
On the same day, the agency released a bulletin warning investors that companies offering interest-bearing accounts might look like those offered by a bank or credit union, but they’re not as safe.
According to Bankrate, peer-to-peer lending platform Lending Club offers the most competitive interest-bearing savings account this month, with yields of 0.65%. Lending products from crypto companies like BlockFi and others often give customers 8% APY or more.
Meanwhile, in much newer DeFi markets, similar cryptocurrency fixed income strategies promise higher returns bordering on the eccentric.
“Many are attracted to high yields, but remain cautious about avoiding hacks and other smart contract risks that could negatively impact their performance,” Jerry Sun, analyst at the Messari crypto research platform, told Yahoo Finance.
The momentum, according to Sun, makes investors hungry for better information. As a report in The Block noted recently, Wall Street is augmenting its cryptocurrency research capabilities in an effort to feed investors hungry for reliable information.
David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.
Read the latest financial and business news from Yahoo Finance
Read the latest cryptocurrency and bitcoin news from Yahoo Finance
Follow Yahoo Finance on Twitter, Instagram, Youtube, Facebook, FlipboardAnd LinkedIn