How to identify a dubious crypto project and protect your money, time

Cryptocurrency scams: The token and Web 3.0 economy has innovative projects as well as dubious NFT launches.

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Data suggest that billions of dollars worth of investors’ wealth has been lost to non-transparent blockchain projects across the world.

Transparency is believed to be one of the core values behind every blockchain-based crypto project. Armed with such a belief, many unsuspecting investors do not hesitate to risk their hard-earned money even in apparently dubious projects.

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Data suggest that billions of dollars worth of investors’ wealth has been lost to non-transparent blockchain projects across the world.

Rug pulls

In 2021, over $2.8 billion was lost to rug pulls, a kind of scam where developers disappear with investors’ money after appearing to be building a legitimate project. According to Chainalysis, a crypto analytics firm, 90% of the total value lost to rug pulls in 2021 was due to a centralised crypto exchange called Thodex, whose CEO disappeared after the exchange stopped users from withdrawing funds.

Rug pulls are more common in non-fungible tokens (NFT), memecoins and DeFi (decentralised finance) because of the hype and ease of getting a token listed. The infamous Squid Game tokens had non-descript developer teams created with fake identities. A Chainalysys report says it is very easy for those with the right technical skills to create new DeFI tokens and get them listed even without a code edit.

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Almost every blockchain or blockchain-based project is powered by a “currency” or token which is traded on crypto exchanges against real money. On CoinMarketCap website, which provides data on cryptos, as many as 9680 tokens are listed. Even in many legit projects, developers intentionally make things less transparent and don’t share circulation stats. Several projects focus more on marketing and less on development.

“The token and Web 3.0 economy is witnessing a co-existence of innovative projects and dubious token launches. Tokens are being used widely to bootstrapped crypto projects. It is, therefore, essential to look at the tokenomics of token based blockchain projects to ascertain risks pertaining to manipulation and centralisation of tokens in a few wallets,” says Sharat Chandra, VP, Research and Strategy at EarthID, a blockchain-based identity management platform.

Experts say that non-transparent projects are doomed to fail in the long run. Investors need to be wary of typical characteristics of such projects and do proper due diligence to save money and time.

Evaluate project before investing
“The best way to evaluate a blockchain project is to do due diligence on the team behind the project, the utility, and interact with community discord channels to catch warning signals,” says Chandra.

Rohas Nagpal, chief blockchain architect at HyFi Blockchain, recommends a five-point checklist, a.k.a. R.O.H.A.S. method—revenue potential, organisation, history, algorithm and social following before deciding whether a blockchain project is worth your money.

Safety checks

  • Vet the revenue model from project whitepaper/ website
  • Read about team members’ credibility on LinkedIn
  • Look into algorithms & tech platforms. Check out on GitHub
  • Scan the project’s profile on Twitter, Discord, Instagram, LinkedIn and Facebook

A crypto asset must have a strong revenue model. Investors can get details of this from the whitepaper of the project and also from its website. “Make sure that the project has a highly-skilled, respected team with strong prior experience, strong credibility, and positive social media status. You can get these details from the LinkedIn profiles of the team members,” he says.

It is important to check the history of the financial performance of the project. Find out whether it has shown strong growth in transaction volume, active users, trading volume. The next important facts are availability of adequate liquidity, multiple trade pairs and listing on multiple credible exchanges. This information can be easily availed from sites such as CoinMarketCap and CoinGecko.

Algorithms and technology platforms should be looked at before investing. Since most crypto projects are open source, you can get this information from GitHub. If relevant, the project must have had security audits from reputed security auditors.

Lastly, the project should have a good social presence. Check out the project’s Twitter, Discord, Instagram, LinkedIn, Facebook, and other social media profiles.

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