In June 2021 when Baine Brock first discovered the decentralized finance (DeFi) project, Helios Cash, the Dallas, Texas based appliance repairman thought he’d found an investing strategy that could generate returns to make hedge funds blush.
He’d “thrown money” into Bitcoin and cryptocurrencies for almost 5 years but in recent months he found DeFi where investors could "put their crypto to work" by lending assets to blockchain apps in return for yield.
By investing in Helios Cash, the 39-year old could earn an annual percentage yield (APY) at 1200% without selling his original investment.
Unlike the less than 1% APY traditional banks offer customers, interest-bearing crypto accounts promise massively fatter yields with a lot more risk.
One added risk: higher likelihood investors might allocate funds to "rug pull" scam where crypto con artists set up a project, take in investor capital then bail.
The trend is giving rise to a new breed of "vigilantes" and startup businesses hoping to shed some light in the wild but promising corner of the crypto market as retail investors hunger for basic fraud protection.
Less than a week after he “aped in,” all $10,000 of Brock’s funds, in addition to the Helios Cash website, had mysteriously disappeared.
“No, man. I’m sorry it's gone :(” an anonymous user in a Telegram channel called RugDocs told Brock later that day. Through Google, the investor had stumbled into this online community.
By that time, the RugDocs cohort were well aware of the situation. Stacked at the top of the their website homepage, a banner for Helios Cash flashed in red with a "High Risk" label.
More than a year ago, something similar happened to a couple with Silicon Valley ties who lost around $200,000 to a DeFi scam called MoltenSwap. After investing cryptocurrencies for years then discovering the compelling returns in DeFi through a friend, the couple became intoxicated with the high yields.
“My husband promptly jumped all in, six figures of his money. He got scammed immediately and lost around $200,000. It was horrifying,” explained the wife, who now using an online pseudonym "The Rug Doctor," runs RugDocs as its founder and CEO.
The firm rates crypto projects, warning when new ones might scam investors. The idea came in the aftermath of the couple's own money-losing experience.
Whether from the fixation to win their stolen funds back or catch more scammers from hoodwinking other investors, the Rug Doctor immersed herself in arcane smart contract details following her husband's "rug pull" incident.
For fraudsters, rug pulling investors is sometimes as simple as copying an existing protocol's codebase then making a couple discretionary changes.
Getting smart on smart contracts
After learning the programming language called Solidity that's used in most smart contracts, the Rug Doctor found she could evaluate projects in ways akin to reviewing a company's financial statements.
Leaning on programming experience from her graduate work, she trained herself how to spot well designed smart contracts from those like Helios Cash which allowed the creators the option to migrate all investor funds into their personal wallets.
Before she or her husband allocated their funds, she started reviewing a project's smart contracts — and found plenty of scams. That prompted her to begin sharing reviews over social media. The free content quickly took off and by the end of the summer of 2021, the Rug Doctor's free reviews had morphed into a full-on business.
While I can’t claim a project I let advertise on the platform will do well, I can at least be pretty certain it’s not going to hurt users, which the users appreciate.The Rug Doctor
RugDocs now employs over 30 people across the world, including a number of college students based in Malaysia, a communications professional in London, and a grandmother living in Thailand.
Eight of the startup's employees work full time reviewing smart contracts. With each review, they assign a “risk rating” for how likely a given protocol is to “rug pull” investors. They also run basic Know Your Customer (KYC) checks on each project's team.
Altogether, the business offers retail investors risk mitigation and monetizes its website traffic by offering advertising to vetted projects.
The system is community-led and not without its loopholes. Positive reviews or “badges” can be nabbed by illegitimate projects, but thousands of investors allegedly use RugDocs research. When they catch a project unfairly using a "reviewed by RugDocs" badge, they warn the company, which will mark the project as an unvetted investment.
Newer investors may not be as plugged in as the old, but RugDocs still offers one of the better free alternatives for scam protection available in the market, as Baine Brock can attest.
“While I can’t claim a project I let advertise on the platform will do well, I can at least be pretty certain it’s not going to hurt users, which the users appreciate,” the Rug Doctor told Yahoo Finance.
'Attracted to high returns'
At its November peak, the market capitalization of all DeFi tokens comprised just under 6% of the total crypto market. But that belied breathtaking growth which has made some regulators nervous.
According to research firm Fundstrat, over 2021 coin market cap for DeFi related tokens ballooned from $1.7 billion to $170 billion, with capital that flowed into DeFi protocols from May 2020 to the end of 2021, skyrocketing from $1 billion to $250 billion.
Efforts are unfurling to curtail the money online fraudsters are able to squeeze from unsuspecting investors. Regulators, and firms like RugDocs, have tried to warn investors chasing those high returns, 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 vowed to protect investors and hold firms accountable for what they're selling. Recently, the SEC announced crypto company BlockFi had paid $100 million to settle allegations over high-yield interest-bearing products.
The same day, the agency released a bulletin warning investors that companies offering interest-bearing accounts might look like those offered by a bank or credit union, but aren't nearly as safe.
According to Bankrate, peer-to-peer lending platform Lending Club offers the most competitive interest-bearing savings account this month for fiat currencies, with yields of 0.65%. Lending products from centralized crypto companies like BlockFi and others often give customers 8% APY, or higher.
Similar DeFi fixed income strategies promise yields that border on the incredible and outlandish.
“Many are attracted to the high returns but remain wary about avoiding hacks and other smart contract risks that could negatively affect their performance,” Jerry Sun, an analyst with crypto research platform, Messari, told Yahoo Finance.
The dynamic, according to Sun, makes investors ravenous for better information. As a report in The Block noted last month, Wall Street is also eager to boost their crypto research capabilities with institutional investors just as hungry to gain exposure to the market.
David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.