Crypto unchained

Chapter 7

Chapter 7: Risks and scams

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Chapter 7:

Risks and scams

While the crypto-asset ecosystem presents a plethora of opportunities, the emerging asset class is also prone to scams and risks.

They typically surround the areas of governance, centralization and misleading promises.

Governance

When it comes to crypto risks, governance plays a crucial role. Ultimately, it all comes down to how control is distributed — one of the key differences between coins and tokens.

The two possible scams we generally observe

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Centralisation

Currently, the biggest threat faced by the crypto-asset ecosystem is centralisation.

Bitcoin was designed as a decentralised, P2P system, where no single entity has control. But over time, part of the crypto ecosystem has started to look a lot like traditional finance, with a concentration of powers in a few hands.

Centralisation is prominent in:

  • Smart contract platforms: since tokens are hosted on them, they’re also dependent on those networks.
  • Token governance: many projects have a core team in control.
  • Crypto exchanges: platforms like Binance hold customer funds and have a monopoly-like position
  • Mining pools: large mining pools dominate the network, reducing the distributive nature of crypto-assets.

The biggest challenge in crypto isn’t the technology. It’s the inability to fully capture what a distributed network is. Since the creation of Bitcoin, almost all additional innovation in the space was a step towards centralisation.

Misleading promises

Scammers do not lack creativity when it comes to creating pitfalls for users.

Common crypto scams

A few examples to look out for

Rug pull scams

  • Developers launch a new token & hype it up.
  • The price rises as people buy in.
  • But later, creators drain all assets and disappear, leaving the token worthless.

Ponzi scheme scams

  • Promise of guaranteed returns with little to no risk.
  • Profits aren’t generated through real value but by using new investors’ money to pay older ones.
  • Eventually, when new investors stop joining, the scheme collapses.

Honeypot scams

  • Smart contracts designed to trap investors.
  • Initially, it allows small deposits and withdrawals to build trust.
  • But once larger sums are invested, withdrawals are blocked.

How to stay safe?

Do your research.

Avoid hyped-up & vague investments.

Check terms & conditions.

If it’s too good to be true

it probably is.

The paradox

Nakamoto created Bitcoin with the ideal of a distributed world in which everyone can participate. These days, the lack of regulation combined with a tendency of centralisation are a testimony that we are far from this ideal.

So where does that leave the future of crypto?

“Cryptocurrencies are worth nothing.”

—Christine Lagarde

Chapter 8:

Outlook

As crypto continues to evolve, one big question remains: is crypto here to stay, or will governments shut it down?

Read chapter 8