The “Rug Doctor” Who Advises Crypto Investors Against “Horrible” DeFi Scams

A self-proclaimed “doctor” has a lesson she’d like to teach investors about decentralized finance (DeFi), an increasingly popular lending industry that has become a battleground against cryptocurrency fraud.

Even the most seasoned DeFi players can find themselves caught off guard by hacks and fraud. Yet retail investors in the industry crave basic fraud protection, which has spawned a new breed of “vigilants” and start-ups to meet the demand.

More than a year ago, a Silicon Valley couple lost around $200,000 to a DeFi scam. Taking the online pseudonym ‘The Rug Doctor’, the wife – who spoke to Yahoo Finance on condition of anonymity – now runs a crypto rating company which warns when new projects could scam investors blinded by the promise of big returns.

In late 2020, a friend introduced the couple to DeFi, who had invested in cryptocurrency years before, and they quickly found DeFi compelling. The product offered variations on crypto loans where investors could reap returns ranging from 50-300% APY.

Intoxicated by the returns of crypto “staking” with protocols, the pair quickly bit — and eventually discovered MoltenSwap, a project that promised an outlandish 3,000% annual percentage return (APY).

“My husband quickly went all-in, six figures of his money. He got scammed immediately and lost around $200,000. It was horrible,” the Rug Doctor told Yahoo Finance over the phone. His pseudonym is a play on a term where crypto developers attract investorsonly to “pull the rug” and bail out with the money.

Whether it was because of setting high yields or the hope that they could somehow recover the funds, the couple refused to leave DeFi. For several weeks, the Rug Doctor delved into the mysterious details of smart contracts and learned how they actually worked.

At its peak in November, the market capitalization of all DeFi tokens was just under 6% of the total crypto market. But that belied a breathtaking growth in the crypto segment, which made some regulators nervous.

According to research firm Fundstrat, the market capitalization of DeFi coins in 2021 has increased from $1.7 billion to $170 billion, the capital that has been poured into DeFi protocols from May 2020 to the end of 2021, is increased from $1 billion to $250 billion.

Leveraging blockchain-based smart contracts, “DeFi strives to create a more accessible, efficient and transparent financial system,” Fundstrat wrote in a recent report.

Getting Smart About Smart Contracts

An image of a woman holding a mobile phone in front of the Ethereum logo displayed on a computer screen. Tuesday, January 12, 2021, in Edmonton, Alberta, Canada. (Photo by Artur Widak/NurPhoto via Getty Images)

By learning a programming language called Solidity that is used in most smart contracts, the Rug Doctor discovered that she could actually evaluate projects in a way similar to reviewing a company’s financial statements. Drawing on programming experience from her PhD program, she taught herself how to examine smart contracts.

She started looking into smart contracts for a project before she and her husband earmarked their funds – and found plenty of scams. This prompted her to start posting her reviews on social media, and the free content quickly took off: by late summer 2021, the Rug Doctor review had turned into a full business model.

While I can’t claim that a project I let advertise on the platform will do well, I can at least be fairly certain that it won’t harm users, which users appreciate .The carpet doctor

The company now employs 30 people around the world, including a number of students based in Malaysia, a communications professional in London and a grandmother living in Thailand.

Eight Rug Doctor employees work full-time to review smart contracts and assign a “risk rating” to the likelihood that a given protocol will “pull” its investors. They also perform basic know-your-customer (KYC) checks on each project’s team.

The company offers a basic risk-mitigation resource for investors trying to avoid scams, but monetizes website traffic by offering advertising to approved projects.

Positive reviews or “badges” can still be scooped up by illegitimate projects, but hundreds of investors use Rug Doctor’s research. When they catch a project unfairly using a “reviewed by Rug Docs” badge, they alert the company, which will mark the project as an unverified investment.

New investors may not be as hip as older ones, but the founder said Rug Docs still offers one of the best free alternatives for scam protection on the market.

“While I can’t claim that a project I’ve let advertise on the platform will do well, I can at least be fairly certain that it won’t harm users, which the users appreciate,” the Rug Doctor told Yahoo Finance.

While hackable software vulnerabilities can pose hidden but costly risks to even the most skilled DeFi teams, retail investors in the space are also looking for basic fraud protection and a number of pseudonymous vigilantes and agents. taxpayer businesses have sprung up to meet the demand.

“Attracted by high yields”

BRAZIL - 2021/09/08: In this photo, Bitcoins are displayed.  It is a decentralized cryptocurrency, being an electronic currency for point-to-point transactions.  (Photo Illustration by Rafael Henrique/SOPA Images/LightRocket via Getty Images)

BRAZIL – 2021/09/08: In this photo, Bitcoins are displayed. It is a decentralized cryptocurrency, being an electronic currency for point-to-point transactions. (Photo Illustration by Rafael Henrique/SOPA Images/LightRocket via Getty Images)

As cryptocurrency products have taken off, efforts are underway to reduce the money that online scammers can extract from unsuspecting investors. Regulators and the likes of the Rug Doctor have tried to warn investors addicted to high yields, but in volatile and opaque crypto markets, it’s impossible to catch every scam.

In particular, DeFi has landed in the crosshairs of Securities and Exchange Commission Chairman Gary Gensler, who has pledged to protect investors and hold companies accountable for what they sell. Recently, the SEC announced that crypto firm BlockFi paid $100 million for resolving claims about interest-bearing high-yield products.

On the same day, the agency published a bulletin warning investors that companies offering interest-bearing accounts may resemble those offered by a bank or credit union, but are not as safe.

According to The bank rate, peer-to-peer lending platform Lending Club offers the most competitive interest-bearing savings account of the month, with yields of 0.65%. Lending products from crypto companies like BlockFi and others often give customers 8% APY or more.

Meanwhile, in much newer DeFi markets, similar crypto fixed income strategies are promising higher returns that border on the weird.

“Many are attracted to high yields but remain cautious about avoiding hacks and other smart contract risks that could negatively affect their performance,” Jerry Sun, an analyst at crypto research platform, Messari, told YahooFinance.

The momentum, Sun says, makes investors hungry for better information. Like a report in The Block recently notedWall Street is boosting its crypto research capabilities in an effort to feed investors hungry for reliable information.

David Hollerith covers cryptocurrency for Yahoo Finance. follow him @dshollers.

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