DeFi Wallet Scams And How To Avoid Them

Table of content

• The Most Common DeFi Wallet Scams
• Phishing and Social Engineering Scams
• Rug Pulls and Exit Scams
• Action Steps for Scam Victims
• Choosing Secure DeFi Wallets
• How To Spot DeFi Wallet Scams?
• Wallet Security Best Practices
• DeFi Wallet Scams Bottom Line
• FAQs On DeFi Wallet Scams

Decentralized Finance (DeFi) offers many opportunities but also comes with risks. Here are the most common scams targeting DeFi wallet users:

Rug Pulls

A rug pull is when developers launch a project, attract investment, and then quickly steal the money. In the end, investors are left with worthless tokens.

For example, Meerkat Finance promised high returns on the Binance Smart Chain. After raising a lot of money, the developers drained the liquidity pool. In the end, the token’s value crashed, and investors lost their funds.

Impersonation Scams

Scammers pretend to be trusted figures or official project teams to deceive users.

For instance, scammers created fake X accounts resembling Binance or Uniswap. They sent messages about special bonuses or new features. The messages led users to fake sites that stole their wallet info. Scammers used this to steal their funds.

Scam Tokens

A new scam token appears about every four minutes in the DeFi wallets. The scam tokens make it hard for real projects to stand out and increase the risks of accidentally investing in a fake token.

Malicious Smart Contracts and Wallet Drainers

Malicious smart contracts and wallet drainers are programs designed to steal funds from users' wallets.

The programs have hidden functions. They let the creator take money anytime or use tricks, like reentrancy attacks, to drain wallets. For instance, some tokens on the Binance Smart Chain are designed to automatically empty users' wallets when interacted with, disguised as high-performance farming opportunities.

Scammers in the DeFi community often use phishing and social engineering to trick users into giving away their funds.

Phishing scams involve fake websites, emails, or messages that steal your login credentials or private keys. Scammers often send emails or direct messages pretending to be from a trusted wallet provider or exchange. The messages include links to fake websites that look almost identical to the real ones. 

Once you enter your details, scammers use them to access your wallet and steal your funds. Always verify URLs and avoid clicking on links from unknown sources to avoid becoming a victim of a phishing scam,

Meanwhile, social engineering scams manipulate users into making decisions that benefit the scammer. For example, scammers often impersonate as customer support agents on social media or forums, offering help and asking for private keys or seed phrases. 

Another common trick is the giveaway scam, where scammers claim you’ve won crypto but require you to send a small amount first to “verify” your wallet.

Scammers often use social media to trick people. They create fake accounts pretending to be trusted companies or influencers and run fake giveaways or promote false investments. They add fake comments and likes to make their posts look real. Many people lose money by falling for the scams.

For instance, in 2023, scammers impersonated the popular DeFi protocol Curve Finance by creating a fake X account. They promoted a fake giveaway, asking users to connect their wallets to claim their prize. Many users lost funds after interacting with the fake link.

To protect yourself, always double-check URLs, avoid sharing sensitive information, and be cautious of offers that seem too good to be true when using a DeFi wallet.

Rug pulls and exit scams use DeFi's decentralized and, often, unregulated nature. Scammers set up a project with a token or liquidity pool in rug pulls or create smart contracts with secret features. 

For example, scammers use rug pulls to mint unlimited tokens or withdraw funds. First, they promote the project to attract investors. Then, they launch their attack, draining the funds and leaving investors with worthless assets.

Exit scams are more straightforward. Scammers raise money through ICOs (Initial Coin Offerings), NFT sales, or staking pools, promising high returns. Once they collect enough funds, they abandon the project entirely. Since DeFi transactions are irreversible and scammers often use anonymous identities, recovering funds is nearly impossible.

Both scams rely on creating a sense of urgency and trust. False marketing, fake partnerships, and eye-catching launches help collect funds quickly before the scam is uncovered.

Scammers often use smart tactics to execute rug pull and exit scam frauds. Fraudsters write contracts that allow them to control liquidity or change the rules of the project. Deceitful promotions, such as flashy websites, fake partnerships, or celebrity approvals, lure in unsuspecting investors. Once the scammers raise enough funds, they vanish, leaving no trace.

One recent example is the Frosties NFT rug pull DeFi wallet scam. In early 2022, the Frosties NFT project's creators sold digital collectibles and raised around $1.1 million. Shortly after selling out, the developers abandoned the project, deleted their online presence, and vanished with the funds. This was a textbook-perfect rug pull. However, law enforcement eventually tracked down the culprits, and they were charged with wire fraud and other crimes.

Another is the Squid Game Token scam. The Squid Game Token launched in late 2021, capitalizing on the popularity of the Netflix series Squid Game. The project falsely claimed to be related to the trending show and the token's price skyrocketed due to media hype and FOMO (Fear Of Missing Out). However, the developers applied a “sell restriction,” preventing investors from selling their tokens. Once the token's value peaked, the developers drained liquidity, stealing over $3 million before disappearing.

Taking quick action is necessary if you’ve fallen victim to a DeFi scam. Here’s a simple guide to help you make the next step.

1. Collect all relevant information, including transaction details, wallet addresses, messages, and screenshots.
2. Report about the scam to authorities.
   • File a complaint with your local police or cybercrime division. Provide all the evidence you’ve collected.
   • Report the scam to your country’s financial regulator or fraud agency. For example, in the U.S., there is the Federal Trade Commission (FTC) or the Securities and Exchange Commission (SEC).
3. If you used an exchange or wallet provider, inform them about the scam. They will block further transactions or provide additional guidance.
4. Share your experience on forums or social media to warn others about scams in the DeFi community.

Victims of DeFi scams can take legal action against the perpetrators. Consult a lawyer specializing in crypto or financial fraud to discuss your case. 

One example of a successful prosecution is the 2021 case of a DeFi scam involving the cryptocurrency platform BitConnect. 

BitConnect victims reported their losses after the platform collapsed, and its founders vanished with over $2 billion. Following complaints, U.S. authorities investigated and arrested the main scammers. 

In 2022, they charged founder Satish Kumbhani with running the Ponzi scheme and took millions tied to the scam, returning them to victims.

Moreover, being scammed will have financial consequences beyond the loss of funds. Sometimes, you must report the loss to tax authorities, as it impacts your tax obligations. Consult a tax professional to understand how to report the loss correctly and reduce any more financial risks.

Selecting a secure DeFi wallet is necessary to protect your crypto assets. 

Self-Custody and Private Keys

Self-custody means you have complete control over your crypto assets. Unlike wallets managed by third parties, self-custody wallets store private keys directly with you. This is important because private keys are the only way to access and manage your funds. If someone else controls your keys, they control your assets. Always choose the safest and best DeFi wallet that allows you to own and manage your private keys to stay in control.

Hardware Wallets

Hardware wallets provide extra security by keeping your private keys offline. They are physical devices that store your keys safely, protecting them from hackers or malware. A hardware wallet is a reliable way to reduce risks for anyone holding a noteworthy amount of crypto. Your private keys stay safe even if your computer or phone is in danger.

Some of the most popular hardware wallets are:

• Ledger Nano X
• Trezor Model T
• KeepKey

Open-Source and Closed-Source Wallets

Open-source wallets let anyone view and verify the code. The transparency of open-source wallets builds trust, as security flaws are easier to spot and fix. However, open-source wallets also require more technical knowledge.

On the other hand, closed-source wallets keep the code private, offering a more user-friendly experience but requiring users to trust the developers. While the closed-source wallers are easier to use, they depend heavily on the company’s reputation for security.

Scammers often use tricks to create urgency and manipulate trust. Watch out for these common signs:

• Too-good-to-be-true offers, like promises of free crypto or guaranteed high returns.
• Fake apps or websites. Look closely at app reviews, URLs, and branding to verify if the apps or websites are legitimate.
• Unsolicited messages. Be cautious if someone contacts you with offers, especially on social media or messaging apps.
• Pressure to act fast. Scammers push you to make quick decisions without enough time to verify information.

Scammers also use technical methods like wallet dusting, which means sending tiny amounts of cryptocurrency to track your activity. They use that connection to manipulate your wallet if you interact with these funds. 

Another common scam involves fake airdrops, where scammers trick users into sharing their private keys or connecting wallets to malicious sites, raising questions about how safe is DeFi wallet. Remember that legitimate airdrops never ask for private keys.

To reduce risks, always keep your wallet software updated. Regular updates fix security vulnerabilities and improve protection. Additionally, use multiple wallets instead of keeping all your assets in one. This way, losing one wallet won’t affect everything.

Securing your DeFi wallet is necessary to protect your crypto assets. Some of the best practices to keep your wallet safe from threats are:

Enabling 2FA (Two-Factor Authentication)

2FA adds an extra security by requiring a second verification step when logging in or making transactions. To enable 2FA, go to your wallet’s security settings, choose 2FA, and link it to an authentication app like Google Authenticator or Authy. Once set up, you’ll need a code from the app each time you access your wallet, making it much harder for hackers to break in.

Using Strong and Unique Passwords

Choose a long, random password that is not used anywhere else. Avoid common words, phrases, or predictable patterns. If needed, you can use a password manager to create and store secure passwords. A strong, unique password guarantees that your wallet remains safe even if another account is vulnerable.

Avoiding Untrusted Sources

Download wallet software only from official websites or app stores. Be cautious of links in emails, messages, or social media posts, as scammers often use fake websites to steal information. Check for spelling errors in URLs and ensure the website uses HTTPS. If something feels off, double-check its legitimacy before proceeding.

DeFi wallets are beneficial but come with risks, as scams like rug pulls, phishing, and malicious contracts are common. 

Remember to enable 2FA, use strong and unique passwords, and keep your wallet software updated. Avoid sharing sensitive information like private keys and be wary of deals that seem too good to be true. Scammers often rely on urgency and trust, so take your time to check the details. 

Being attentive and informed is your best defense when asking is DeFi wallet legit or dealing with scams.