DeFi Scams: How To Detect ICO Scams, Honeypots, And Rug pulls
DeFi scams are a worrisome trend in the Cryptocurrency space. From Hackers looking to breach the security of DeFi protocols and exploit bugs in smart contracts to scammers who plot to exploit unsuspecting investors and run away with their funds.
This Post Contains
- Popular DeFi Scams And How To Avoid Them.
- ICO (Initial Coin Offering) Scams.
- How To Detect Fake ICOs.
- Rug pulls.
- How To Detect Rug pull Schemes.
- How To Detect Honeypots.
- Pump-And-dump Schemes.
- How To Detect Pump-and-dump Schemes.
These scammers have devised various means and strategies of ripping off investors.
From pump-and-dump schemes to Honeypots and Rug pulls many Cryptocurrency investors (Most especially on Binance smart chain network) have had harrowing experiences in the hand of these scams.
However, with these scams increasing on a daily basis, it's important that you know how to identify the scam projects and differentiate between them and legit projects.
Popular DeFi Scams And How To Avoid Them
“Since I've been in the Cryptocurrency space, I've never been scammed” some people might hear this statement and doubt its validity. Nevertheless, it's possible to steer clear of Rug pulls, Fake IDOs and Honeypots if you have the right knowledge and do proper research before making investment decisions.
Here are the most common Cryptocurrency scamming strategies and how to avoid them.
ICO (Initial Coin Offering) Scams
An ICO is a method through which Cryptocurrency projects raise funds for their projects before launch. The Cryptocurrency project seeks the help of investors to finance their project by offering to sell their coin to investors at a lower price than the listing price.
The team behind a project may not have the financial capacity to fund their project which is where ICOs come in.
To illustrate, if their coin is going to be listed at an initial price of $0.1, they may offer early investors the chance to buy the coin at $0.05 before listing which means the investors will already be in profit once they list the coin on an exchange.
How To Detect Fake ICOs
- Research the team: Do a thorough research on every individual in the team behind the project, don't just trust the information provided on the project's website. Check their social media accounts and verify if the information you saw on the website is true. Information such as their past work experiences should be paid attention to and verified.
- Check the whitepaper: Analyze every information on the project's whitepaper. A whitepaper is important, it contains information about the project's roadmap, avoid any project without a whitepaper.
Related: Crypto Security: How To Protect Your Cryptocurrencies From Crypto Hackers
If you're in the Cryptocurrency space and you've never heard about Rugpull or don't know what it means then you're not in the Cryptocurrency space or you're a newbie.
Most Cryptocurrency traders will argue that Rug pulls are the most dominant scam in the DeFi industry and they may be right.
Rug pulls happen when fraudulent investors create a token, pump up the price then abandon the project by removing funds from the liquidity pool thereby milking the value of the project and running away with investors funds.
Here's how Rug pulls are done: The Scammers create a token, launch it on a blockchain, and the scammers hold a huge percentage of the token's total supply.
After which they launch a liquidity pool (A liquidity pool is a collection of funds deposited by Liquidity providers into a smart contract that a protocol uses to fulfill trades) for the token and pair it with a base token like BNB or a stablecoin like BUSD (Let's say the token is XYZ coin, the liquidity pool will pair XYZ/BNB or XYZ/BUSD).
They’ll then market their project to Cryptocurrency investors and convince Liquidity providers to invest in their liquidity pool in exchange for transaction fees paid by other users.
Once the amount of liquidity in the pool reaches their target, the scammers dump all their XYZ tokens into the liquidity pool and withdraw all the BNB or BUSD.
This will drive the price of XYZ token to near-zero, leaving investors holding worthless coins while the scammers walk away with profit.
- How To Detect Rug pull Schemes
- Check the token distribution: Go to a blockchain explorer (Etherscan for ERC-20 tokens, Bsc Scan for BEP-20 tokens) and click the holders tab under the token's contract. The blockchain explorers automatically rank the holders according to the percentage of tokens they hold so the first address holds the highest percentage of the token's supply. If you find out that a wallet holds a huge percentage of the supply or few wallets hold more than half of the token's supply it's a Rug pull red flag.
- Do research on the team behind the project: Another red flag of a Rug pull plot is the anonymity of the Dev team. If the team behind the project is anonymous then you should be careful. The only exception is if the anonymous account has earned people's trust by being part of other successful and legit projects.
- Check the official website and community: The information about a project is on their official website. If their website looks sketchy, for instance they're trying to hide information about the team or you can't track their domain, it's something you should pay attention to.
- Check smart contract audits: Tools such as token sniffer, bsc check and Unicrypt run smart contract audits to identify a token's vulnerability, bugs or backdoors created to manipulate the smart contract.
Honeypots Crypto scam happens when investors buy a token but can't sell the token, only wallets that the smart contract allows to sell are controlled by the scammers.
Squid game token is an example of a honeypot scam, investors bought the token but soon discovered that they can't sell when they tried to take profit.
- How To Detect Honeypots
- Check the transfer record: check the token on a blockchain explorer click transfer and verify if people have been able to sell. If all you see are people buying in without records of selling, you're looking at a honeypot.
However, the fraudulent developers can allow some wallets to sell their tokens in order to deceive investors.
- Check the community: Checking the transfer record of the token isn't enough, visit their social media community to see if there are complaints of not being able to sell. Or register interest in investing in the project and investors who have fallen victim might warn you about the scam.
- Check the charts: If all the candles are green and there's no point where there's a retracement you might be looking at a honeypot. The law of gravity also applies to Cryptocurrencies.
- Use A Honeypot Detector: Honeypot detectors simulate buy and sell transactions to verify whether a token is a honeypot. Honeypot.is and detecthoneypot.com are good tools you can use to detect Honeypots.
Let's face it, this doesn't really fall under the category of the scams we've previously mentioned but we have to talk about it as it is the most rampant and yet the most ignored.
Just like the word implies, Pump-and-dump in Crypto happens when a project is created based on hype with the aim of dumping on unsuspecting investors.
The scammers use false information, fake promises, social media influencers and public figures to convince people to invest in the project then the conspirators dump their tokens on investors.
Celebrities such as Kevin Hart and Floyd Mayweather have been accused of promoting pump-and-dump projects and scam projects. Therefore you should be careful and do not invest in a project just because your favorite celebrity is promoting it. They'll sell their tokens once the price goes up and leave you running at a loss if you don't sell on time.
- How To Detect Pump-and-dump Schemes
If all the Dev team have been able to achieve since launching the token is getting a celebrity to support their project avoid such tokens. In short, if there's no real utility or aim of the project, don't invest in it.
Not falling victim to DeFi scams depends on your level of knowledge of the Cryptocurrency space. For every Crypto project you want to invest in, always do your own research before you invest. In addition, scammers are inventing new ways through which they can defraud investors. Therefore, you should also stay up-to-date about their new strategies and ways of tackling them.