The flashing banners promise financial freedom. The slick websites whisper of unprecedented returns. Decentralized Finance (DeFi) previously was hailed as the new frontier of finance. Instead, it now tempts the unwary investor into frauds and schemes like a siren’s call. What’s even more confusing, and quite honestly, soul crushing, is the answer to why so many of these victims, once scalded, return to that hot water repeatedly.

High Risk, Higher Emotional Investment

We've all heard the saying, "Fool me once, shame on you; fool me twice, shame on me." But in the world of DeFi, everything appears to be reversed. Victims aren't ashamed; they're often doubling down. Why? Because the allure of DeFi is about more than a get-rich-quick scheme. It touches upon a deep desire for some agency, for freedom from a political and economic apparatus that so many Americans believe has abandoned them. But this is not only about cash, it’s about one’s hope, and the sad fall when that hope becomes ruinous.

Think about it. You’re the person who’s been, as they say, a little bit more on the outside looking in. Traditional finance seems opaque, rigged against you. Enter DeFi, claiming to offer a more level playing field. You read about anyone from Vietnamese fisherman to unemployed LA bus drivers winning big settlements. Sure, you invest, perhaps timidly at first, but all of a sudden the returns begin flowing in. You think you’ve just discovered your niche, your sweet spot.

Then boom – a hack, a rug pull, a smart contract exploit. Your funds are gone. At first, there’s an exhilarating rush of agency. You think you’re just one break away from something really big and that sugar high can be exhilarating. Like most addicts, you’re starting to do anything to get back that high, anything. The recent $1.5 billion crypto theft, reportedly from a front-end attack, is a stark reminder of the scale of these vulnerabilities.

Sunk Cost Fallacy Fuels the Fire

The sunk cost fallacy looms large in the background. You've already lost money. The idea of giving up, of walking away, of throwing in the towel is excruciating. So you think to yourself, I just need to make back my losses. I'll invest a little more, and this time I'll be smarter. You’re not making a rational decision—you’re acting based on an emotional and frantic desire to go back in time. The study mentioned, based on interviews and surveys of crypto investors, highlights this tragic trend: many victims either do nothing after being scammed or, even worse, reinvest in other DeFi ventures.

It’s analogous to someone who has blown a billion dollars in legal gambling. And so they continue to bet, convinced that the next round will be the hand that doubles down on their bad luck. But the fix is in, and this time the house really does win every time. In DeFi, the “house” is a decentralized and pseudonymous entity, a matrix of unaudited code, anonymous developers, and built in systemic risk.

The Illusion of Control in a Chaotic World

The other darker force at play is the illusion of control. For though DeFi might promise that you’re the one in control of your financial future, it’s an empty promise. We put the keys in your hand, you’re the ones that control where the money goes. This is a dangerous illusion. Few Americans possess the technical know-how to grasp the implications of risk at stake. They’re putting their faith in the supposed security of blockchain, which as the EBI study discusses is one of the biggest myths out there. So they have the assumption that even if the technology itself is safe, everything that’s built on it, these platforms, are secure. They don’t understand the vulnerabilities around smart contract implementation, design flaws, front end attacks.

Users often excessively trust in two-factor authentication (2FA) as the panacea for security. In the world of decentralized finance (DeFi), though, its usefulness plummets due to the nature of private key ownership. They bypass token approval management mechanisms, exposing themselves to dangerous contracts. They don’t regularly reassess and rescind over-approvals, leaving their wallets vulnerable to being picked.

  • Mistake Users believing blockchain technology guarantees the safety of DeFi services.
  • Truth Vulnerabilities exist in smart contract implementation and design.

All of these things together make the absolute perfect conditions to be taken advantage of.

What Can We Do? Empathy and Education

So, what's the answer? More regulation? Maybe. We must address this challenge with sensitivity and information. To do so, we must explore the psychological factors that lead individuals to continue investing in DeFi, despite having fallen victim to scams already. Instead, we should be giving people clear, accessible information about the risks when they do so.

  • Use hardware wallets
  • Revoke unused token approvals
  • Continuously learn about security threats
  • Prioritize security over the allure of profits.

And perhaps most importantly, we need to empower a culture of victim support. Shame and embarrassment are major barriers to getting people the help they need. We have to show them that they aren’t the only ones out there struggling—because there are others—and that there is support waiting for them. We need to start seeing DeFi scams as more than just white-collar crimes. They are all avoidable human tragedies, and armed with the right information and tools, we can keep them from occurring.