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How to Spot Honeypot Crypto Scamsby@ismailmalik
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How to Spot Honeypot Crypto Scams

by Ismail MalikOctober 21st, 2022
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Honeypot scams are very unique in that they are perpetuated through smart contracts. Smart contracts are blockchain-based programs that carry out specific actions when certain conditions (which are specified in the code) are met. Honeypots are known to be more common in the demilitarized zones of popular blockchain networks. This makes them harder to detect by other network users thus, gives them a higher success rate. But these tips may save your money and time both.

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The cryptocurrency sector is truly fascinating; it leverages one of the most innovative technologies of the 21st century and has created a global payment and investment ecosystem that anyone can tap into. Despite all of this, it is also plagued with a number of speed bumps that crypto users have to navigate.

One of these is scams and boy, does the crypto industry have many of them. There are phishing scams that try to con users out of their passwords and private keys, crypto jacking that tries to steal computing power to mine tokens, and much more.

One of the newer and perhaps more exciting crypto scams is the honeypot scam. While the honeypot scam has the same goals as all the others (stealing crypto), it doesn’t work the same way. Simply put, the honeypot scam is one that needs the victim to be a potential scammer themselves.

What is the Honeypot Scam?

Every crypto scam has the medium through which it is facilitated. Phishing scams try to lure you in by pretending to be your wallet provider, crypto exchange, or some other legitimate organization to get your login details.

Crypto jackers tend to hide their bots in fake programs that are published on the internet for unsuspecting victims. Honeypot scams are very unique in that they are perpetuated through Ethereum smart contracts.

Besides being the foundation for the second-biggest cryptocurrency in the world, Ethereum is also used for the creation of smart contracts.

Smart contracts are blockchain-based programs that carry out specific actions when certain conditions (which are specified in the code) are met. So, what does this have to do with honeypot scams?

Well, if there is a vulnerability or loophole that can be exploited in a smart contract, many people will try to take advantage of them. This is where the honeypot scam comes in.

How this works is that the scammer creates a smart contract that allows a user to extract the Ethereum tokens stored in them. So, imagine you come across a smart contract. Not just any smart contract, though. This one has a flaw in its design that you can exploit to extract its tokens. Great!

But there is a catch. You have to send some of your own ether to the smart contract yourself before you can complete the extraction. So, you do and immediately try to get both your money and the previous stash of ether out.

But it turns out there was another vulnerability in the code. You actually can’t extract the tokens and your own money is now gone. At this point, the scammer is able to extract all the ether from the smart contract and has run off.

You’ve been lured by the promise of unearned riches (honeypot) and now you’ve been scammed. This method of scamming crypto owners has, unfortunately, become more commonplace and works by preying on users’ own greed and the complexities of smart contracts.

How Does it Work?

Most times, honeypots are designed to resemble legitimate programs that are built on blockchain. These include banking applications and so on. The smart contract attached to the honeypots is similar to that of these legitimate programs with the major difference being the ‘vulnerability’ that they have

Many times, when a victim comes across a honeypot, they assume that it is a legitimate smart contract or application that simply has a flaw. The way that these traps are set up, it would be very tempting to take advantage of what is seen as a vulnerability in the smart contract and get what is looked at as free money.

If the user then tries to exploit this flaw, their funds are then stolen by the criminals. This is because of a second vulnerability that the user doesn’t know about. This second vulnerability ensures that while the user can put their money into the honeypot, they can’t take any money out of it.

Honeypots are known to be more common in the demilitarized zones of popular blockchain networks. This makes them harder to detect by other network users and thus, gives them a higher success rate.

How Do You Spot and Avoid It?

Now that you understand what exactly a honeypot crypto scam is and how they work, how do you make sure you don’t lose your precious tokens to them?

The simple trick is to avoid them entirely. After all, if you don’t interact with these nefarious smart contracts in the first place, they can’t take your money. Overall, there are two ways to avoid the honeypot crypto scam.

The first is to only use blockchain programs that are reputable and vetted by the community. One thing to note about these honeypot scams is that they thrive mostly in demilitarized zones. The reason for this is to avoid detection by others.

So, whatever you need to do with a blockchain program, be it token swapping or lotteries, make sure it is with widely known and reputable ones. The second thing is to avoid anything that is too good to be true.

One of the key components of making a honeypot crypto scam work is that the victim is often trying to exploit what they see as a weakness in a smart contract. If you come across any smart contract that has a vulnerability that lets to drain its tokens after you deposit some of yours, run in the opposite direction.

Conclusion

So there you have it. Honeypot crypto scams are fast becoming common and making away with users’ hard-earned funds. At its core, this scam preys on users’ willingness to exploit perceived vulnerabilities in code and can be avoided by most crypto users.

The key to this is only using reputable programs and avoiding the temptation to try and exploit vulnerabilities in smart contracts. If you can do this, you are much less likely to fall victim to this sort of scam and both you and your cryptocurrency will be safe.


Also published here.