HOW TO AVOID SECURITY RISKS AND SCAMS IN DEFI DAPPS (Part 1)

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22 Jun 2025

Understanding the Common Dangers in Decentralized Finance

Decentralized Finance (DeFi) offers freedom, speed, and opportunity — but it also comes with serious risks.
Every day, users lose funds due to:

Smart contract vulnerabilities
Rug pulls
Phishing scams
Wallet hacks

But why are these problems so common? And what’s causing them? Let’s break it down.

🔧 1. Smart Contract Vulnerabilities

DeFi apps (DApps) are powered by smart contracts — automated pieces of code. But if there’s even a tiny bug or loophole in that code, it can be exploited.
Here are major real-world examples:

⚠️ The DAO (Ethereum) – 2016

Issue: Reentrancy bug — attackers withdrew funds before balances updated.
Loss: Over $60 million in ETH stolen.
Impact: Caused Ethereum to split into Ethereum (ETH) and Ethereum Classic (ETC).

⚠️ bZx Protocol – 2020

Issue: Flash loan + oracle manipulation.
Loss: Around $8 million stolen across multiple attacks.
Lesson: Insecure price feeds can break entire platforms.

⚠️ Yam Finance – 2020

Issue: Small coding error in rebase logic.
Loss: Tens of millions in locked, unusable funds.
Lesson: Even tiny math bugs can ruin governance.

⚠️ Compound Finance – 2021

Issue: Faulty upgrade allowed excess COMP rewards.
Loss: Over $80 million mistakenly distributed.
Lesson: Upgrades must be carefully tested before going live.

⚠️ Cream Finance – 2021

Issue: Flash loan + reentrancy exploit.
Loss: More than $130 million stolen.
Lesson: Poor security + bad token listings = disaster.

⚠️ Pickle Finance – 2020

Issue: Copy-paste bug in contract code.
Loss: ~$20 million drained from a vault.
Lesson: Vault contracts must be audited carefully.

⚠️ Meerkat Finance (BSC) – 2021

Issue: Contracts changed post-launch to allow fund theft.
Loss: Around $31 million stolen.
Lesson: Always verify whether contracts are time-locked and immutable.

⚠️ BadgerDAO – 2021

Issue: Malicious script on the front-end website.
Loss: Over $120 million stolen.
Lesson: Even secure smart contracts can be useless if the site gets hacked.

Key Takeaway:
Even popular, audited DApps are vulnerable to coding bugs, poor upgrades, or front-end hacks.

💣 2. Rug Pulls

A rug pull is when a DeFi project suddenly disappears after collecting user funds, leaving investors with worthless tokens.

Infamous Examples:
🚨 Squid Game Token (SQUID) – 2021

Chain: Binance Smart Chain (BSC)
Issue: Users couldn’t sell their tokens — price hit $2,800, then crashed.
Loss: Over $3.3 million vanished.
Red Flag: No sell function, anonymous devs.

🚨 Meerkat Finance – Again

Same $31 million rug pull, disguised as a hack.

🚨 Uranium Finance – 2021

Issue: Exploit during migration.
Loss: Over $50 million stolen.
Suspicion: Exploit was unusually specific — possibly planned.

🚨 DeFi100 – 2021

Issue: Website displayed “We scammed you and you can’t do anything about it.”
Loss: ~$32 million estimated.
Note: Team denied it, but funds were gone.

🚨 Thodex Exchange (Turkey) – 2021

Note: Not a DApp, but worth mentioning.
Loss: Over $2 billion disappeared after the founder vanished.
Lesson: Centralized platforms can rug pull too.

🚨 AnubisDAO – 2021

Chain: Ethereum
Issue: Raised $60M, then drained in under 24 hours.
Red Flags: Anonymous team, no product, no audits.

⚠️ Common Rug Pull Red Flags

Red Flag Meaning: No audits Code hasn’t been reviewed for safety.
Anonymous team No accountability if things go wrong.
No locked liquidity Devs can pull all the funds instantly .
Forked code Copy-paste jobs often hide exploits.
Hype without utility Empty promises and no working product.

🕵️‍♂️ 3. Phishing & Wallet Scams

Not all attacks come from smart contracts — many target you directly.

What is Phishing?

When someone pretends to be a legit site (like Uniswap or MetaMask) to trick you into giving access to your wallet.

What is a Wallet Scam?

If someone gets your seed phrase or tricks you into approving a malicious contract, your wallet is emptied — and there's no recovery.

⚠️ Common Wallet & Phishing Scams:

Fake Websites
- Look exactly like real ones.
- You connect your wallet — they steal your tokens.
Fake Airdrops / Giveaways
- “Congrats! You’ve won free tokens!”
- Connect wallet → approve fake transaction → funds gone.
Fake Support on Discord / Telegram
- You ask a question; a fake “support agent” messages you first.
- They ask for seed phrases or send malicious links.
Malicious Browser Extensions
- Look like tools, but secretly steal private keys.
Approval Scams
- You approve a smart contract without realizing it gives full access to your wallet.