How is the wave of scams threatening the DeFi sector?

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On July 17, developer André Cronier launched the Yearn.Finance DeFi lending protocol, giving holders of his native YFI tokens the abil...

On July 17, developer André Cronier launched the Yearn.Finance DeFi lending protocol, giving holders of his native YFI tokens the ability to manage the development of the project. In just a few days, the coin soared from $ 34 to $ 4505. In the wake of the hype around YFI, several clone tokens were launched that failed to succeed. Thus, YFFI and YFII lost 99% and 87.6% of their peak prices, respectively, and the creator of the Asuka token was accused of an exit scam. The price of the original YFI token remains stable for now. Why YFI fired, what happened to its forks, and how the possibility of scam and bubbles threatens the DeFi sector, we understand the material.

Yearn.Finance is the perfect bubble in the DeFi sector

Yearn.Finance is a project based on Yield Farming, one of the main trends and drivers of the DeFi sector.
Let's briefly recall the essence of Yield Farming. The user can earn up to 100% per annum from the turnover of their digital assets on DeFi credit platforms. At the same time, platforms based on income pharming pay users their native tokens for any interactions with the DeFi protocol. Thus, they allow not only lenders to earn money, but also borrowers. Huge returns are attracting crowds of quick-profit investors to the nascent sector. Obviously, the system works only due to the influx of new users, but as long as the protocols pay their double-digit percentages, everyone is happy with everything.
At the end of July, in the wake of the hype around Yield Farming, the Yearn.Finance project took off, offering earnings on income farming. The protocol was launched on July 17, led by developer  André Cronier .
Yearn.Finance is a yield aggregator for lending platforms, with a suite of smart contracts that maximize profits by automatically changing liquidity pools based on who provides the highest payouts.
The platform allows you to trade DAI, USDC, USDT TUSD and sUSD tokens with up to 1000x leverage with an initial prepayment or up to 250x leverage without any initial fee. Through the multi-token bidding mechanism, Yearn.Finance users can also receive YFI, the native token of the project, allowing them to participate in its governance.
YFI does not provide any percentage remuneration, but allows voting on issues important to Yearn.Finance. André Cronier emphasizes that this makes his project truly decentralized. All management is carried out by the YFI holders who receive them as a reward for providing liquidity. In two weeks, the community has already managed to hold seven votes and approve the emission of new tokens, in addition to the original 30,000 coins.
In total, at the start, Cronje created 30,000 coins, which were distributed among protocol users in three separate pools of liquidity - the developer did not keep a single token for himself. Cronier honestly  admits that YFI has absolutely no intrinsic value. It was assumed that the token could not be bought or sold, and it would not be available on exchanges. Cronje also warned users that if they do not understand how his software works, then they should not contact Yearn.Finance.
Although Cronje stated that the token was worthless and would not be traded, the markets decided otherwise. Someone listed the token on Uniswap and Balancer, allowing speculators to buy YFI, and its holders to make money on it. The initial estimate of YFI was $ 34, but by the end of the next day the token reached a price of $ 1765. In just a week after launch and placement, contrary to the initial announcement on the Uniswap decentralized exchange, the YFI project coin has grown by 13,200% - from $ 34 to $ 4505. After that, it also rapidly dropped in price to the still impressive $ 2120, rose again to $ 4656, and is now trading at $ 4183. This rapid rise in the price of the token has allowed the protocol to achieve an annual return of over 1000% - the highest rate among other protocols using Yield Farming.
YFI price chart as reported by CoinGecko. Source .
Now, according  to  DeFi Pulse, Yearn.Finance ranks ninth in terms of the amount of funds raised, and the amount of funds blocked in the protocol is almost $ 165 million (at the maximum, this figure reached $ 345 million).
Change in the amount of blocked funds in the Yearn.Finance protocol, according to DeFi Pulse. Source .
Cronier admitted in  comments to  Cointelegraph that he himself does not understand why YFI is growing so rapidly. He did not count on such success and at the launch he only wanted to "distribute the voting rights." Perhaps Cronier is right, and users were really attracted by the opportunity to participate in project management. The trend to give users voting rights began in DeFi with the distribution of COMP, the Compound Credit Protocol token.
The current hype around YFI and other projects based on Yield Farming was described by Cronier as a "fad". He believes that " after distribution, everything will calm down and the system will return to normal ." He emphasized that he does not own any tokens, and their price does not matter to him. When asked if YFI would fall, he said that " eventually it will ."
Yearn.Finance is a hype child that has grown too fast even by DeFi and crypto market standards. This is a great example of a bubble in the DeFi sector. Unlike the time-tested protocols like MakerDAO and Compound, Yearn.Finance did not have an audience, no venture capitalists invested in it, and the code did not even pass the test (however, code auditing does not guarantee the security of the protocol either). Users don't think about what could go wrong. And in an experimental protocol, a lot can go wrong without an audit. In the end, nothing prevented Cronier from performing an exit scam and disappearing with all tens of millions of dollars frozen in the protocol.
Surprisingly, with a sharp collapse in the price of YFI, the loss of users may not be so great. So, according to the  calculations of the  developer in the field of Yield Farming under the nickname "Weeb", if YFI falls 100 times, the investor will lose only 8.8% of the funds invested in the asset frozen in the protocol.

YFFI and YFII clones failed to repeat the fate of the original

After the success of Yearn.Finance, several projects tried to repeat his fate. Following YFI, its forks were launched: YFFI, YFII and Asuka. The appearance of coins was largely provoked by Cronier himself, who urged Twitter to make clones of his asset. He also stated that he has several ideas on how to set up the project that he would like to share with the developers of potential forks.
“For those who speculate on YFI, YFII and YFFI. I will repeat this one more time. All these new coins have no intrinsic value (even André Cronier stated this). They also have a low initial offer and are extremely volatile. I warned you, ”Michael Gu, host of the Boxmining YouTube channel, warned his followers.
In the wake of the hype around YFI, his copies also attracted close attention, but could not repeat the success of the original. They skyrocketed and then dropped to near zero. Unlike YFI, it was not possible to support the HYIP and keep the cost of YFFI, YFII and Asuka. YFFI and YFII were not helped even by the maximum similarity of names, obviously created deliberately in the hope of inattentive users.
“The last clone is trying something new. If you are copying YFI (and you can), please change a few things so that we get new data from the experiment. Repeating the same experiment is not fun. If you are already planning to clone YF, I have several ideas to get different results, ”commented Cronier on the originality of YFFI and YFII tokens.
The Chinese YFII clone token launched on July 29. At the start, the coin cost $ 460, by July 30 it rose to $ 1128, but dropped to $ 100- $ 120 in a week. To differentiate from YFI, developers  have stripped  themselves of the admin access keys to the YFII smart contract, meaning they can no longer create additional tokens.
price chartYFII price chart as reported by CoinGecko. Source .
YFFI  launched on August 1 at $ 619, but immediately began to lose value, dropping to $ 138. The next day, the coin managed to overcome the $ 500 milestone, but after that it was rapidly becoming cheaper. At the time of the article's release, YFFI costs about $ 0.86.
Twitter user "Toos!" noticed that the founders of the project began to accumulate coins 5 hours earlier than the others, thereby gaining the opportunity to quickly sell a large number of coins.
YFFI price chart as reported by CoinGecko. Source .

Alleged exit scam of the founder of the Asuka clone token

With the Asuka clone, the story is more instructive. Last week, it was launched by Jung Chan, a well-known person in the Korean crypto community who participated in the work on Ethereum Classic.
Asuka has been  promoted  as "Dogecoin among DeFi tokens." The total supply of tokens was reported to be 21,000, with the first 10,000 tokens issued in the first week of the project. It was assumed that such a small number of coins would provoke a sharp jump in prices. Expectations were met, but not for long.
“Unlike other YFI forks, that is, YFII or YFFI, Asuka will allocate 5% of the premium of the initial offer to expand the rewards of contracts of other pools in the future. Until then, a management contract for the Asuka token will be developed, and the key holders will be selected from among those who manage to farm the most, ”the project description on the 4chan forum says.
To earn Asuka tokens, users had to buy a DAI stablecoin, transfer it to the Balancer liquidity pool, receive its native VRT token, and then stake that token.
According to media reports, at the start of trading, Asuka tokens were valued at $ 20, but very soon they reached $ 1600. Local newspaper Joind  reported that Asuka raised more than 10 billion won (≈ $ 8.3 million) over the weekend. The project promised a yield of around 500% per annum. But it took the tokens only three days to fall. Already on August 3, Jung Chan closed the Asuka website, as well as all his social media accounts, and disappeared. Users accused him of an exit scam - fleeing with money.
Du Van Nam, MakerDAO partner for business development in the Asia-Pacific region,  wrote  in his Twitter, that Chan Chong has sold all of its tokens on the transferred DAI Binance and fled with the words " I am ashamed, so I'll run away ." According to reports, Chan destroyed the "owner's key" of the liquidity pool, thereby restricting access to any of the blocked funds for investors. A representative of the exchange in the comments to The Block  said that the site has identified the transfer and is ready to cooperate with South Korean law enforcement agencies after receiving an official request from them.
It is unclear how much money users have invested in the Asuka token. Du believes that this is a relatively low amount of $ 30,000- $ 60,000. After the news of the exit scam, the token fell by more than 99% in value - to about $ 10.

Finally

The DeFi sector is showing unprecedented growth. Back in early June, it accumulated $ 2 billion, and now - over $ 4 billion. And this area shows no signs of slowing down. In the wake of the hype around income pharming, projects like YFI are gaining instant popularity among those who want to quickly earn their dollars.
But security in DeFi hasn't kept pace with such explosive growth. The desire of users to earn double-digit percentages during a recession and the hope of developers not missing out is so strong that they don't care much about security. DeCenter previously wrote about the risks of the new sector, among which the main place is occupied by protocol vulnerabilities, for example, cases with bZx and dForce.
Most of the top performing coins this year are DeFi tokens. The upcoming Ethereum 2.0 launch should also have a stimulating effect on these projects. But in the pursuit of lucrative DeFi coins, many users do not look at what they are buying.
So, in June ,  up to a dozen fake DeFi tokens appeared on the Uniswap exchange  , posing as original protocols and tricking users into exchanging their funds for a useless token. Among them are fake coins Balancer, Curve Finance, 1inch.exchange, dYdX, bZx, Tornado.Cash and Opium. This became possible since the decentralized exchange allows any user to import any token by pasting its address into the Uniswap exchange menu. It is unclear exactly how many traders were tricked into buying fake tokens, but the exchange still lacks a mechanism to prevent fake listings.
“On Uniswap, the real and fake BAL tokens have the same ticker,” the DefiPrime service warned users.
The case of fake tokens on Uniswap is simply user carelessness. But the YFI, YFFI, YFII and Asuka cases are examples of bubbles whose users are likely to have a good idea of ​​what they are doing and what they are risking. The fact that YFI and an increasing number of DeFi projects are entirely managed by their communities is undeniably a step forward - it democratizes the crypto space and develops the decentralized ideas on which the entire sector has been built. But they lack functionality, they grow only due to the hype.
Therefore, it is important for investors not to succumb to the loss of profits syndrome (FOMO) and to maintain due diligence before investing in a project. Now DeFi projects run the risk of repeating the sad experience of the ICO bubble in 2017, when a year later most tokens were worthless. We are sure it is only a matter of time before we hear about the major scams and scams in the DeFi sector. All this can seriously damage the prospects for decentralized finance, which now seem to be truly revolutionary.

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