If you have been around the crypto world for some time, chances are you have heard of people being scammed. Indeed, the crypto world is exciting and filled with the possibilities of making good money. However, it is riddled with scams for unsuspecting people, and one of the most deceptive tricks is a honeypot scam.
I know, “honeypot” sounds sweet and innocent. But do not be deceived. While this category of scam often looks sweet on the inside, it is dangerous on the inside. In this article, I will break down what a honeypot scam really is and how to avoid it.
So, let’s dive right into it!
KEY TAKEAWAYS:
- A honeypot scam is a type of trap where the smart contracts of a token have been programmed to allow you to buy in but not sell out.
- People fall for honeypot schemes because the scammers use sneaky tactics like flashy websites, fake audit reports, and even endorsements from influencers.
- Red flags of honeypot scams include suspicious tokenomics, a promise of huge returns, and the lack of smart contracts verification.
- If you fall victim to a honeypot scam, stop investing immediately, warn others about it, and learn from your mistake.
What Is a Honeypot Scam?
A honeypot scam is a type of trap where the smart contracts of a token have been programmed to allow you to buy in but not sell out. It is a malicious token created to lure investors with the promise of profit. Sadly, they would later realize that they cannot withdraw their funds.
In other words, the scam is not necessarily in what you see but in what you cannot do. Imagine walking into a shop where everything is on a 90% sale. You get all the items you want and pay at the register. But when you try to walk out the door, you cannot because you are stuck inside. Yes, this is how you can view a “honeypot” in real life.
Why Do People Fall for Honeypot Scams?
Now that you have a basic understanding of how honeypot scams work, you might be wondering, “Why would anyone fall for this anyway?” Well, the truth is that honeypot scams are incredibly sneaky because scammers are getting really creative. Moreover, they prey on excitement and the fear of missing out (FOMO).
These malicious people use flashy websites, fake audit reports, and even endorsements from influencers. Furthermore, they mimic the names and logos of legitimate projects. When you are in the moment, it is easy to miss the red flags, especially when the token is pumping, and everyone seems to be making money.
So, How Do Honeypot Scams Work?
Below is an overview of how the honeypot scheme works:
- A new token is launched: The process begins with the launch of a new token. It is usually listed on decentralized exchanges (DEXs) like Uniswap, PancakeSwap, or SushiSwap.
- The market buzz begins: The scammers create hype around the token by posting on platforms like Telegram and Discord. They can pay influencers to tweet about it or even fabricate fake reviews and social proof. The goal is to get people to buy in quickly.
- People start buying: Early buyers see the token price rising. Some even test the token by buying small amounts. They see its value rise in their wallet, and it seems like everything is working fine.
- The trap becomes obvious: Once buyers try to sell, that is when the scheme is revealed. The smart contract behind the wallet prevents or blocks transactions unless you are on the scammer’s allowlist. While some victims cannot sell at all, others can face exorbitant fees that leave them with almost nothing.
- Scammers drain liquidity: Eventually, the malicious actors pull the rug and transfer the liquidity pool to an anonymous wallet. The project disappears, and then the website and socials suddenly go dark.
Honeypot Scams Red Flags to Watch Out For
If you want to avoid falling for a honeypot scam, here are warning signs to look out for:
- You cannot sell on DEXs: If you are considering investing in a new token, try selling small amounts of it right before buying. If the sale does not go through, that is a massive red flag.
- The gains are too good to be true: Be skeptical if a token’s price skyrockets within minutes or hours of launch and people are bragging about a 100x increase. Such unsustainable price surges are classic bait tactics.
- No contract verification: Walk away if a token’s smart contract is not verified on blockchain explorers like Etherscan or BscScan. Verified contracts will typically allow you to review code and spot malicious functions.
- Suspicious tokenomics: Some honeypots code ridiculous sell taxes of up to 99% fees in their contract. This makes it nearly impossible to cash out without losing all your funds. Therefore, you should check the token’s fee structure before investing in it.
- Absence of liquidity lock or audit: Legitimate projects usually lock their liquidity for a specified period. If there is no liquidity lock or audit, nothing is stopping the developers from draining the pool whenever they want.
- Anonymous or unverifiable team: A project with an anonymous team or a team with fake profiles is a red flag. While anonymity is not always bad in crypto, it increases the risk because there are no trust indicators.
Read Also – How to Identify A Legitimate Crypto Project
Tools You Can Use to Check for Honeypots
The crypto world is not new to honeypots. Therefore, the community has developed tools that can sniff out potential honeypot scams. Here are a few you can check out:
- Token Sniffer: Scans token contracts for malicious functions or known scam patterns.
- DEXTools: Lets you monitor trading pairs and see liquidity, slippage, and transaction behavior.
- Honeypot.is: Specifically tests whether a token can be sold. It is not foolproof, but it is a helpful first step.
What to Do If You Fall for a Honeypot Scam
Scams are unfortunately common in crypto, such that even smart and experienced people have fallen victim. So, if you realize a honeypot scam has happened to you, do not beat yourself down. Instead, do the following:
- Stop investing immediately.
- Warn others about the token by posting on crypto communities and social media.
- Report the scam token to platforms like CoinMarketCap, CoinGecko, and Binance Smart Chain to get the listing flagged.
- Move on and learn.
Final Thoughts
Honeypot scams are like digital Venus flytraps, enticing and easy to walk into but incredibly difficult to escape. However, with a little caution and a healthy dose of skepticism, you can avoid them. Now that you have learned how this scam works be sure to stay sharp and curious, and as always — never invest more than you are willing to lose.
References
- medium.com – Beginner’s Guide to Web3 Security: Avoiding Honeypot Scams
- ccn.com – What Are Honeypot Scams? How to Detect and Avoid Them?
- trustwallet.com – Crypto Scams: How to Spot Honeypot Tokens
