The Dangers of Investing in Cryptocurrency Without Audit Reports

The Dangers of Investing in Cryptocurrency Without Audit Reports

A recent report by blockchain security firm Hacken has shed light on the risks associated with investing in cryptocurrency projects that lack audit reports. The Q3 2023 Security Insights report revealed that out of 78 examined rug pulls, only 12 projects had undergone and reported audits. An audit report conducted by an independent third-party serves as a vital tool for investors, as it provides a comprehensive review of a token, identifies any vulnerabilities, and alerts potential risks.

Rug pulls are considered to be one of the simplest scams in the crypto world, and they can have devastating consequences for investors. By analyzing various rug pull cases, Hacken has identified certain patterns that can help investors spot potential scams. One of these patterns is the presence or absence of an audit report. While an audit report may validate a project’s authenticity, it does not guarantee protection from a sudden withdrawal of liquidity.

Even if a project has undergone an audit and published a report, it is still possible for malicious changes to be made to its tokenomics and smart contract, leading to fraud. Hacken found that some of the projects that were rug-pulled in the last quarter had actually been audited, but had received poor scores. Unfortunately, investors ignored the audit results and continued to participate in these projects, resulting in significant losses.

One notable example is the case of Magnate Finance, a lending protocol based on crypto exchange Coinbase’s Base network. Despite having an audit report that highlighted the potential for manipulation of the token by the project’s deployer, users chose to overlook these warnings. As a result, the deployer eventually pulled the rug and stole over $5 million from investors. This serves as a stark reminder that simply relying on the fact that a project has been audited is not enough to guarantee its safety.

Lessons from DeFiLabs

Another case highlighted in the report is that of DeFiLabs, a decentralized crypto staking platform. An audit conducted by blockchain security firm CertiK warned of centralization risks within the platform’s contracts. However, these warnings were ignored by users, and the platform eventually pulled the rug and vanished with $1.4 million worth of users’ assets. This case further emphasizes the importance of taking audit reports seriously.

Through their research, Hacken has identified a common pattern among rug pulls. Many of these scams involve projects with poor audit scores or warnings of potential vulnerabilities. It is crucial for investors to thoroughly review audit reports, consider the credibility of the audit firm, and carefully assess any risks mentioned. Ignoring these warnings can lead to significant financial losses.

The findings of Hacken’s report highlight the need for investors to exercise caution when investing in cryptocurrency projects. Audit reports play a critical role in assessing a project’s legitimacy and identifying potential risks. However, it is important to remember that audits are not foolproof and cannot guarantee protection against rug pulls. Investors must conduct thorough due diligence, carefully analyze audit reports, and consider any warning signs before investing their hard-earned money. Only by taking these precautions can investors mitigate the risks associated with cryptocurrency investments.

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