A Guide to Staying Secure On DeFi Lending Protocols

Last updated on May 29th, 2023 at 11:14 am

Earning a passive income and gaining financial flexibility are just a couple of the benefits of using a lending protocol.

But, before you begin, a few hesitations might enter your mind. Like, how do you judge a protocol’s security? How do you know which projects are worth your time and money?

In this article, we’ll discuss ways to minimize risks and make the most out of your lending and/or borrowing experience.

Common Scams to Look Out For

Learning about these common scams will allow you to recognize unsafe projects from afar and avoid putting your assets at risk.

Honeypots

If a new coin keeps rising, but no one is selling it, this might indicate a honeypot fraud. Here’s how it goes: A token’s rising price draws investors in, but the only wallet that the smart contract allows to sell is controlled by the scammers.

This often happens with projects that get a lot of mainstream media attention– don’t be fooled by the glamour. The founders can hide behind the buzz and, when the time is right, dump their tokens and disappear.

In general, don’t equate media attention with trustworthiness. Influencers are paid to promote protocols, and media outlets often don’t have the insider expertise to evaluate the legitimacy of a new project.

Bottom line: Do Your Own Research (DYOR).

Twitter Scams

On Twitter, scammers create accounts impersonating celebrities and then reach out to DeFi enthusiasts for financial support. They often send information about giveaways or competitions and solicit funds. Scam accounts can usually be identified by simply checking the account information.

In the past, legitimate, well-known accounts have been hacked and used for scams.

As a general rule, avoid sending money through Twitter.

Phishing

This scam has been around for a while— scammers pretend to be someone else to collect personal information. Phishing is usually done via email; with someone pretending to be contacting you on behalf of a protocol and claiming that your account has been compromised or you owe money. They usually request personal information and/or funds.

To avoid falling for this scam, double-check the contact’s email address (which will almost certainly contain random characters rather than the platform name) and avoid clicking random links.

Tips for Identifying Secure Protocols

Now that you’ve learned about a few common scams, let’s look at what makes a DeFi protocol secure so you can find the best places to lend and/or borrow.

Audits

All transactions in decentralized finance run on smart contracts. Any flaws in the code of these contracts can create vulnerabilities that give hackers easy access to funds. That’s why most reliable protocols hire third-party auditors to review code and documentation for potential weaknesses.

Afterward, they’ll publish a summary and report that includes an analysis of the protocol’s security. While these audits aren’t foolproof, they can eliminate major threats and are an industry standard.

Community

A vibrant community is critical to the success of any DeFi project. Before joining any DeFi protocol, check out the protocol’s presence on social media channels such as Twitter, Telegram, and Discord. While a large following is a positive indicator, an active community is arguably more important. If people consistently participate in discussions, it may be a sign that they aren’t bots and that the platform is still engaging and benefiting users.

Founders & Team

Founders with technical experience and expertise will make the project safer and more successful.

Look for projects whose founders have relevant DeFi experience.

Explore New Lending Protocols on the Market

We’ve compiled a list of new platforms with a competitive advantage that may be able to put your money to work for you.

Sturdy

Sturdy is the first and only positive-sum DeFi lending protocol that offers interest-free loans and high-yield deposits. Borrowers benefit from interest-free loans and the elimination of all fees except gas fees. The platform provides lenders with APYs ranging from 15% to 20%—the high yields typically associated with volatile assets without the risk of holding them.

Sturdy is currently live on Fantom and Ethereum. With a track record of establishing solid partnerships and supporting new assets and markets, the protocol continues to serve and create a strong community of users.

Morpho

This is a peer-to-peer layer built on top of protocols like Compound. It functions as a lending pool optimizer. In other words, it matches lenders and borrowers on a peer-to-peer basis to improve the capital efficiency of lending pools. Consequently, Morpho boosts APYs while maintaining lending pool liquidity and functionalities.

With Morpho, users benefit from increased liquidity and capital efficiency.

Gearbox

This generalized leverage protocol provides decentralized leverage that can be used across protocols.

It can be used in margin trading or leverage farming, for example.

Gearbox can even be used to provide leverage-as-a-service on other protocols without modifying the architecture.

Traders and farmers can get up to 10x leverage on their borrowed liquidity, while lenders earn extra yield by providing more liquidity.

Start Exploring DeFi Applications Today

Before diving into the world of decentralized finance, learn about common scams and how to spot them.

You’re ready to start borrowing and lending with our list of secure and cutting-edge DeFi lending protocols.

Author Bio

Sam Forman is the founder of Sturdy, the first positive-sum DeFi lending protocol. He became passionate about cryptography as a high schooler, and went on to study math and computer science at Stanford before dropping out. When he’s not working on Sturdy, Sam likes practising Brazilian Jiu-Jitsu and begrudgingly rooting for the New York Giants.

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