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Episode 6: The Traps of DeFi
Living in a Zero-Trust Society: My Strange Daily Life Being Overwhelmed by a WEB3.0 Fundamentalist Engineer / Can’t Use DApps Without Running a Full Node!
Note
This story is written with the assistance of generative AI for the purpose of making the Web3.0 world enjoyable to learn about. While we pay careful attention to the accuracy of technical information, we cannot guarantee that all content is completely accurate. Please use this as a supplementary learning tool and enjoy it with a relaxed mindset.
Characters
- I: A novice developer who recently transitioned from being a DTP operator to an engineer
- Mr. D: A Web3.0 fundamentalist in his mid-40s with extreme vigilance
Episode 6: “The Traps of DeFi”
The moment I opened the USB drive I’d received from Mr. D, I involuntarily gasped.
“This is…”
On the screen was a thorough analysis report of the DeFi protocol I’d been eyeing—one that advertised a “guaranteed 30% APY.” Code vulnerabilities, contradictions in the token issuance plan, suspicious movements in the developer wallet… The analysis was as meticulous as case files in a detective drama.
At the end of the report, a conclusion was highlighted in red: “Conclusion: A textbook Ponzi scheme. Collapse is only a matter of time.”
I held my head in my hands. I’d been thinking of investing a small amount. Just last episode, I’d learned how dangerous it was to ignore Mr. D’s warnings. This time, I should heed his analysis.
The USB also contained an encrypted message.
Tomorrow 7 PM, Akihabara Electric Town exit.
Not the usual cafe.
”If we’re going to talk DeFi, cafes with ears in their walls are too dangerous.”
Bring a small amount of crypto.
The next day, I arrived at the station on time. Mr. D was already there—wearing not his usual black jacket, but a flashy aloha shirt. A disguise, perhaps.
“You’re not late. Good.”
He scanned the surroundings warily and spoke in a low voice.
“Follow me. Don’t talk while walking.”
I obeyed in silence. He moved deftly through the crowd and slipped into a back alley. A few minutes later, we stopped at the top of a staircase leading to a basement in an old building.
“Here.”
Down the stairs was a small sign: “Crypto Bar SATOSHI.” We opened the door to a dim, calm space. It was a small, counter‑only bar. We were the only customers.
“Welcome, D.”
The bartender greeted Mr. D. They seemed familiar.
“Our usual spot.”
Mr. D took the far end seat at the counter, and I sat next to him.
“This place is safe,” he said quietly. “The owner is an old acquaintance and accepts crypto payments. No surveillance cameras, either.”
The bartender brought cocktails. “A new friend?”
Mr. D nodded. “He’s here to learn about DeFi’s dangers.”
The bartender smiled. “Then you’ve met the best teacher.”
Mr. D opened his laptop and pulled up the website of the DeFi protocol I’d been interested in.
“Let’s start with basics. What is DeFi?”
“Decentralized finance—financial services without centralized intermediaries…”
“Half right,” Mr. D said. “But many DeFi projects call themselves ‘decentralized’ while being highly centralized in reality. Developer anonymity, upgrade authority over contracts, token distribution—centralized power structures lurk everywhere.”
He pointed at the “Guaranteed 30% APY” text on the top page.
“What do you think when you see this?”
“Honestly, it’s attractive—but so high it’s suspicious.”
“Your intuition is correct,” he nodded, pleased. “In traditional finance, risk and return correlate. If there’s a 30% annual return, there must be commensurate risk. Yet this project doesn’t mention risk at all. That alone strongly suggests fraud.”
He took a sip and continued.
“So where does this ‘30%’ come from?”
He opened the whitepaper PDF and showed the tokenomics section.
“Here. Every day, 0.082% new tokens are minted and distributed as staking rewards. That annualizes to 30%. In other words, this so‑called high yield is just inflation.”
“Inflation?”
“Yes. They’re just printing tokens. No different from a central bank,” he said dryly. “It’s dilution, not value creation. If everyone tries to withdraw at once, the price collapses.”
He dove deeper into the code—smart‑contract vulnerabilities, skewed governance token distribution, developer anonymity—pointing out problems one after another.
“And the biggest problem is that it checks every box of a Ponzi scheme.”
He counted on his fingers.
“One, abnormally high yield. Two, unsustainable tokenomics. Three, paying existing participants with new entrants’ money. Four, opaque revenue sources.”
He looked at me sternly.
“You were going to invest in this?”
My face burned with embarrassment. “Just a small amount… to test it.”
He sighed deeply. “Even a small amount is dangerous. Once you connect to a malicious contract, everything in your wallet may be at risk.”
Mr. D switched to a practical checklist—wallet permissions, timelocks, multisig requirements, admin key custody, emergency pause logic, upgrade paths, and how to audit on‑chain actions via explorers. He had me practice reading and verifying each point.
He even made me simulate an exit: “If withdrawals are paused, what signals appear on‑chain? Where do dev wallets move funds? How do CEX deposits show up?”
“I see… So the 30% comes from token emissions, and the ‘guarantee’ is just language. Admins can pause withdrawals, there’s no meaningful multisig, and the proxy lets them swap logic…”
Mr. D smiled for once. “Good. You’re still missing things, but you’ve spotted the primary red flags.”
At that moment, his phone buzzed. He glanced at the screen and his expression changed.
“It’s happening…”
He showed me his phone. There was an urgent announcement from the very DeFi protocol we were analyzing.
“‘To perform a system upgrade, we are temporarily disabling the unstake function’… That’s…”
“A prelude to a rug pull,” he said calmly. “They’re preparing to flee.”
He quickly opened a blockchain explorer and began tracking the project’s developer wallets.
“Look. Large transfers are heading to centralized exchanges. They’re cashing out.”
I couldn’t take my eyes off the screen. We were watching a fraud unfold in real time.
“If you’d deposited funds, you’d be losing everything right now.”
Cold sweat ran down my back. If not for his warning, I might have been a victim, too.
“DeFi is revolutionary,” Mr. D said, finishing his drink. “But it’s also the most dangerous financial experiment. No regulation. No insurance. No safety net. You must protect your assets yourself.”
He continued with a grave look.
“High yields always come with commensurate risk. This principle doesn’t change—TradFi or DeFi. Jumping at a ‘guaranteed 30% APY’ is like jumping off a cliff.”
I nodded. “But there are trustworthy DeFi projects, right?”
“Of course,” he admitted. “But it takes knowledge and experience to tell them apart. Start with the basics.”
He pulled a small device from his pocket and handed it to me.
“For emergencies. It enables encrypted communication and lets you sign transactions without connecting to the internet. Next time, I’ll teach you how DEXs work and how to use them safely.”
I accepted the device and thanked him.
“By the way, what do you usually drink here?”
Mr. D actually smiled. “A Trustless Martini. The bartender makes it specially. Every ingredient is one I’ve personally verified.”
The bartender chimed in with a laugh. “He even tested the water I use. Said he can’t trust ‘centralized tap water.’”
I couldn’t help but laugh. Mr. D’s extreme vigilance can be comical, but today taught me that it can also save lives.
On the way home, his words echoed in my head: “In DeFi, there’s no regulation or insurance like a bank. You must protect yourself.”
In TradFi, deposit insurance is a safety net. If a bank fails, deposits are protected up to a limit. If your credit card is misused, you can report it and get reimbursed. Even mistaken bank transfers can sometimes be reversed.
In DeFi, transactions are final. Send to the wrong address and the assets are gone forever. If a contract has a bug, no one compensates you.
I understood Mr. D’s distrust of centralized institutions—after the 2008 crisis and recurring data breaches, caution is justified. But centralized systems also provide something human: recourse.
DeFi’s cold maxim—“code is law”—and TradFi’s human judgment and relief. Both have strengths and weaknesses. Mr. D believes in the former. Most people rely on the latter.
Which world should I live in? Or can I take the best of both?
Web3.0 is full of danger—and possibility. Understanding both sides is likely the key to surviving in this new world.
Back home, I opened the book “Fundamentals of Cryptography” Mr. D had given me and continued studying.
Turning the pages, I reflected on the day. If I’d invested in that protocol, I might have lost everything. I felt ashamed for laughing at Mr. D’s extreme caution.
Cryptography is undeniably difficult—elliptic‑curve cryptography, zero‑knowledge proofs—daunting math everywhere. Wallet apps like MetaMask hide the complexity, so you can use crypto without understanding any of it.
But is that truly “using” it?
As a DTP operator, I trained my eyes to catch hidden typos in seemingly perfect text. Now that experience is reborn—as eyes that can spot “blind spots” hiding inside seemingly safe smart contracts.
Page by page, I recalled Mr. D’s words: “Only code is fact.”
The Web3.0 world is one where you verify with your own eyes, think with your own head, and protect with your own hands. It can be a lonely, harsh road—but at the end lies true freedom.
Looking out the window, Tokyo’s nightscape spread before me—countless lights weaving a view as beautiful, complex, and vast as transactions on a blockchain.
Tech Tips
Rug Pull
A fraud where developers abscond with investors’ funds. Often the team is anonymous and hides backdoors in contracts; once enough funds are gathered, they drain everything. Red flags include abnormally high yields, anonymous teams, and lack of credible audits.
Impermanent Loss
A risk when providing liquidity to pools. For example, if you provide to an ETH/USDC pool and ETH’s price rises significantly, the value you can withdraw may be less than if you had simply held ETH. It’s called “impermanent” because it disappears if prices revert, but in practice it can be permanent.
Next Episode Preview: “Episode 7: The Dark Side of Decentralized Exchanges”
Mr. D’s next lesson dives into DEX mechanics and safety. “MEV, slippage, sandwich attacks—if you don’t defend yourself, you’re the product,” he warns…
End of Episode 6