Ultimately, the only way to find out is to invest and hope.
Disclaimer: I am not a financial advisor. The content of this article is purely for educational/research purposes only and is merely based on own research.
To be honest, there is no definite answer to determine if the defi project is a scam or not, also it is entirely up to the individual investor to do their own research before investing in any defi project. The list below is essentially my personal checklist of what to look out for before investing in a project.
1) Understand the project’s concept/goal by reading the Whitepaper
From reviewing the website design to reading the project’s whitepaper, you can understand the project’s goal, know the team behind it and most importantly, gauge whether the team has really put in effort in planning, listing down all required information about the project and having a clear action plan on how to achieve their goals. For example, Hector Dao has a very clear roadmap for the project and the team will often provide updates by posting in social media channels to all investors. This greatly increases the trust among their investors — less likely to be a scam.
2) Total Value Lock (TVL) and Market Cap
TVL and market cap can say a lot about the project. Usually, the higher the TVL and Marketcap can signify more people has already invested in the project. Essentially more people are in the same boat with you, probably there will be a handful of “whales” who also invested a substantial amount as well.
Personally, I would look at the TVL more than the market cap, as TVL directly mean the total number of value being locked/invested in the project. Market Cap is directly linked with current supply multiplied by the price, and it varies from project to project, to me market cap can’t justify the project creditability.
3) Review from others
This is rather important, reviews can make or break a good project. For me, I would like to see good reviews mixed with a few negative reviews, because there is no project out there that is 100% filled with good reviews, the chances of them “buying review” is higher than actually from the real investors. If possible, look for reviews from all other social media sites, ask the communities or even look into the youtube comment section.
4) Wait it out
Scams projects don't last long, just look at the recent Olympus Dao fork scams. Most of the rug pull happens within a month after release. So in some cases, you just have to wait it out for the scams project to the surface and you have successfully avoided scams!
5) Invest and Hope
Ultimately, there is only 1 way to test if the project is a scam or not; just invest an amount to test. If the projects really turn out to be scams and rug pull all your money, at least you only lose a small portion. Don’t be greedy by the fantastic APY, the higher the APY the more dangerous the project. And if the project turns out to be good, then you can invest more money into it.
EndNote
Please do your own research before investing. There are too many projects out there, do not be afraid of missing out, slowly take your time to find and filter out the best project out there. A good project will last for many years, missing out a few months is nothing compared to the long term goal.
Rule No.1 is never lose money. Rule No.2 is never forget Rule No.1 — Warren Buffet
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