DeFi Survival Guide: How Not to Get Rekt

Last updated on June 24th, 2023 at 11:54 pm

Introduction

The decentralized finance (DeFi) market has experienced tremendous growth in recent times, offering numerous opportunities. However, it has become increasingly important to address the risks associated with this booming sector.

The market’s total value locked (TVL) is currently estimated at $49.49 billion. Shockingly, a substantial $5.29 billion has been stolen from DeFi due to various exploits, representing approximately 10.69% of the total value locked.

While DeFi presents exciting prospects, it, unfortunately, attracts malicious individuals seeking to exploit unsuspecting users. Protecting oneself in the world of DeFi has therefore become a matter of utmost importance. Your financial security hangs in the balance; although not quite life or death, but still quite significant.

DeFi empowers individuals by eliminating intermediaries and granting direct control over one’s wealth. However, this newfound freedom also necessitates taking responsibility for ensuring your own financial security. Funds lost in DeFi scams are nearly impossible to recover.

Now, you might be wondering if there’s a way to safely participate in DeFi, without falling victim to fraudulent schemes. The answer is a resounding yes; you’ll discover how in just a moment!

This article will guide you through the essential steps to protect yourself and maintain a secure position in DeFi. Most importantly, we’ll show you how to avoid getting “REKT”.

What Does it Mean to Get ‘REKT’ in DeFi?

The term ‘Rekt’ is a slang derived from ‘wrecked;’ commonly used in the crypto community to describe heavy financial losses or catastrophic failures.

Getting rekt is not limited to the average person; even experienced investors like Mark Cuban have experienced being rekt.

Now, there are quite a few ways to get rekt in DeFi.You’ve got rug pulls, exploits and hacks that can drain your funds in an instant. And, of course, the good ol’ bad trades that can result in some serious financial loss.No matter how you slice it, getting rekt is something you want to avoid at all costs.

Common Ways to Get ‘REKT’ in DeFi

Rug Pulls

Rug pulls are unexpected scams where attackers deceive DeFi users by selling them non-existent or worthless tokens. The term “rug pull” is used because it perfectly captures the feeling of users when they realize they’ve been scammed, as if the rug has been pulled out from under them.

Outlined below are some of the rug pull techniques used by attackers:

Soft rug: This happens when a project team falsely claims to have been hacked or simply dumps the tokens held by the development team, effectively rendering the remaining tokens worthless. This scheme is more likely to occur when the team controls a significant portion of the token’s total supply.
Hard rug: Attackers use smart contracts to execute this type of rug pull. They write the code of a smart contract in a way that allows for future manipulation. Hard rugs are often executed when DeFi users least expect.
Honeypot: A honeypot scam lures unsuspecting investors by allowing them to buy a token but not sell it. Only the creators of the token have the ability to sell. Attackers generate a sense of FOMO (fear of missing out) through airdrops, attracting new investors who later discover they are unable to sell their tokens.
Presale/IDO scam: Here, developers sell tokens in a presale or Initial DEX Offering (IDO), promising future launches and profits, then vanish without delivering on the project for which they sold the tokens.

Flash Loans

Flash loans are an interesting DeFi feature that allows users to borrow uncollateralized loans and use and return the funds within the same transaction. The feature is facilitated by a smart contract that ensures the loan is payable in a single transaction before giving it out. However, flash loans have trended for the wrong reasons. In fact, flash loans have contributed a significant portion of DeFi exploits.

Flash loan exploits often require the use of large capital to manipulate token prices. Attackers with large capital can manipulate token prices, creating arbitrage opportunities to make gains. In this situation, if you buy a token at an inflated price due in a flash loan, you may experience losses when the price returns to normal. Liquidity providers can also lose funds in flash loan exploits.

The Pancake Bunn is a notable example of a DeFi protocol getting ‘REKT’ due to a flash loan attack. The hacker took advantage of the flawed WBNB-BUNNY LP and took out nearly 700,000 BUNNY tokens valued at around $200 million at the time of the exploit.

Arbitrage

Arbitrage involves taking advantage of price discrepancies across different decentralized exchanges (DEXes). An arbitrage opportunity is possible because DEXes have varying liquidity and get their quotes from different price oracles.

Arbitrage, just like flash loans, is legitimate; however, there have been instances where arbitrageurs have caused DeFi users to lose funds. In some cases, arbitrage opportunities lead to massive slippage, where users end up paying more for less.

A notable example of a DeFi Protocol getting ‘REKT’ via arbitrage is Saddle Finance. Within hours of its launch, arbitrageurs exploited an ongoing flash loan attack on the protocol. They took out over 7.9 BTC from the early liquidity providers (LPs) within 6 minutes.

Importance of Security in DeFi

DeFi is an ecosystem of trustless entities leveraging blockchain technology. Security is a shared responsibility for all participants; every DeFi user is responsible for safeguarding their funds and protecting themselves against bad actors. Once you lose access to your funds or fall victim to malicious actors, there’s not so much you can do. Therefore, prioritizing security in DeFi is crucial to stay one step ahead of potential threats.

DeFi innovations are still very much new. Though they offer great benefits, there may be vulnerabilities that attackers can exploit. Neglecting security measures in DeFi exposes users to these vulnerabilities, essentially accepting the associated risks.

Maintaining a high level of security in DeFi can be as simple as avoiding public WiFi networks and refraining from installing malicious software.

DeFi hacks and scams can take various forms, and while we may not have witnessed all potential attacks, it is prudent to guard against both known and unknown vulnerabilities. By staying vigilant and implementing robust security measures, you can ensure your safety in the DeFi ecosystem.

How to Stay Safe in DeFi and Avoid Getting ‘REKT’

Here are 9 tips to help you stay safe in the DeFi sector, protect your investments, and minimize the risks associated with this evolving ecosystem.

1. Understand the Risks (Do Your Own Research)

The first way to not get rekt is to understand the risks involved in DeFi. Surprisingly, many people rush into DeFi for exponential gains with little to no idea of what they’re getting into.

DeFi protocols utilize blockchain technology and smart contracts, which, although secure at their core, can still be vulnerable to exploits that may put your funds at risk.

Even audited smart contracts don’t guarantee absolute safety, as there have been instances where audited contracts were still exploited. Educate yourself on the risks associated with DeFi and the protocols you’re using. Tools like Unrekt can assist you in verifying the smart contracts you interact with.

2. Research a Project before Investing.

Before you invest your funds in a DeFi protocol, take the time to thoroughly research the project. Read their whitepaper, understand their tokenomics, and evaluate the team behind it. While some project teams may choose to remain anonymous, focus on other indicators of credibility and success. Anonymity itself shouldn’t be seen as a red flag, as even the creators of Bitcoin remain anonymous to this day.

3. Invest Wisely

One cliche advice usually taken for granted in DeFi is to “only invest what you can afford to lose.” While it’s true that DeFi can offer substantial rewards, it’s still a relatively new and imperfect market. It hasn’t undergone the same level of testing and regulation as traditional finance and should not be considered a direct replica.

Investing in stocks and real estate may be less risky compared to having the majority of your money in DeFi. Therefore, it’s advisable to allocate only a small portion of your overall portfolio to DeFi investments.

4. Be Cautious of High APYs and APRs

Approach investments that promise exceptionally high returns with caution. More often than not, DeFi activities that guarantee sky-high returns are not sustainable in the long run and can even jeopardize your funds. Remember the old saying, “If it sounds too good to be true, it probably is.” Instead of chasing risky and unsustainable opportunities, focus on finding safe investments that offer reasonable returns.

5. Use Trusted Protocols

It seems like there’s always a new DeFi protocol popping up, each promising higher rewards than the last. However, it’s generally safer to stick with established protocols that have a proven track record. Open-source protocols with a large user base are often more secure since they undergo continuous monitoring by a larger community.

6. Keep Your Private Keys Safe

Remember the saying, “Not your keys, not your coins.” Your private keys should always be kept private. When you create a new wallet, you’re usually asked to write down a 12 or 24-keyword mnemonic that serves as your private key. Losing control of your private keys means losing access to your funds.

In DeFi, where there are no intermediaries, a lost private key is typically irretrievable. Ensure you store your private keys securely and avoid sharing them or entering them on untrusted platforms. Also, be cautious when accessing your DeFi wallet on public Wi-Fi networks, as they can compromise your security. Additionally, be wary of any activities that require you to disclose your private key details.

7. Diversify Your Investments

The age-old saying: “don’t put all your eggs in one basket,” is a great piece of advice, especially when it comes to investing. By spreading your investments across different crypto assets, including large caps, mid-caps, and slower-growing projects, you can effectively manage risks. Relying too heavily on a single asset exposes you to greater potential losses.

8. Use Multiple Wallets

Store your crypto holdings in different wallets to minimize risk. You can have dedicated wallets for specific purposes. If you have a wallet you consistently use to interact with DeFi protocols, make sure you don’t keep a substantial amount of funds in that wallet. If you can afford to, using a separate device for each wallet is a good security measure. Cold wallets and hardware wallets are also excellent options for storing your crypto assets when engaging in DeFi activities.

9. Embrace Long-term Investing (#HODL)

Adopting a long-term investment approach helps you steer clear of impulsive decisions during volatile market cycles. Being a long-term investor allows you to avoid panic selling in bear markets. However, you should only HODL projects that you’ve properly researched and can trust to play out positively in the long term. Also, having the mindset of a long-term investor having a long-term mindset makes you less susceptible to falling for scams that promise quick and unrealistically high returns.

In Conclusion,

DeFi offers both exciting opportunities for financial growth and control, but it’s important to be aware of the risks involved.
While there’s no guarantee of complete safety in DeFi, you can take steps to minimize risk and maximize your investment potential.
Researching reputable projects, diversifying your investments, and understanding market volatility are key considerations. Look into the background and track record of projects before investing, and consider spreading your investments across different projects to reduce risk. Keep in mind that market conditions can change rapidly, so staying informed is essential.
It’s important to remember that DeFi is still in its early stages and lacks the extensive testing of traditional finance. Therefore, it’s advisable to allocate only a small portion of your funds to DeFi investments. This cautious approach takes into account the potential for unforeseen challenges and uncertainties.
By approaching DeFi with caution and informed decision-making, you can navigate this evolving landscape and capitalize on its benefits while mitigating potential risks.

Disclaimer: This article is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.

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