Honeypot Tokens: How Regular People Can Avoid This Crypto Scam

Table of Contents

Investing in new tokens on blockchain platforms can be exciting, but it's essential to be aware of potential scams, such as honeypot tokens. These tokens can trap investors by allowing them to buy but not sell. This guide will help non-technical users detect honeypot tokens and make safer investment decisions.

I. Honeypot Tokens

Understanding Honeypot Tokens

Honeypot tokens are a type of cryptocurrency scam designed to trap unsuspecting investors. These tokens appear legitimate at first glance, enticing users to purchase them with the promise of high returns. However, the catch lies in their smart contract code. Once bought, these tokens cannot be sold, effectively trapping the investor's funds. The scammer benefits as the token's value increases with new purchases, but investors cannot realize their gains or even recover their initial investment.

The mechanics behind honeypot tokens can vary, but common tactics include coding the smart contract to allow only specific addresses (often those controlled by the scammer) to sell the token. Another method is to impose restrictions on transactions that effectively prevent sales after the initial purchase. This deceptive approach can be particularly harmful to non-technical users who may not have the skills to analyze smart contract code.

Importance of Detecting Honeypot Tokens

Detecting honeypot tokens is crucial for several reasons:

1. Financial Protection: The primary reason for identifying honeypot tokens is to protect your investments. By recognizing and avoiding these traps, you can prevent significant financial losses.

2. Market Integrity: Scams like honeypot tokens undermine trust in the cryptocurrency market. By exposing and avoiding these scams, investors contribute to a healthier and more trustworthy market environment.

3. Educated Investing: Learning to detect honeypot tokens helps you become a more informed and vigilant investor. This knowledge can be applied to other areas of cryptocurrency and blockchain technology, enhancing your overall investment strategy.

4. Community Support: Detecting and reporting honeypot tokens can help protect other investors. Sharing your findings with the community can prevent others from falling victim to the same scams, fostering a supportive and collaborative investment community.

To understand more about crypto attack methods. Recently, we have published an article relate to Web3 Security Essentials: Spotting Scams & Protecting Your Crypto

II. Accessing and Verifying the Token's Smart Contract

Using Blockchain Explorers

Popular Blockchain Explorers

Blockchain explorers are online tools that provide detailed information about blockchain transactions, addresses, and smart contracts. Some of the most popular blockchain explorers include:

- Etherscan (for Ethereum): One of the most widely used explorers, Etherscan allows users to view transaction histories, contract details, and more for the Ethereum network.

- BscScan (for Binance Smart Chain): Similar to Etherscan, BscScan provides comprehensive details about transactions and contracts on the Binance Smart Chain.

- Polygonscan (for Polygon): This explorer is used to access data on the Polygon (Matic) network, offering functionalities akin to those of Etherscan.

Using these explorers, you can delve into the specifics of any token or smart contract to gather critical information.

Finding the Token's Smart Contract

To find the smart contract of a specific token:

1. Visit the Explorer Website: Go to Etherscan (or the relevant explorer for the network you're investigating).

2. Search for the Token: Use the search bar to enter the token's name or paste its contract address. If you don't have the contract address, you can usually find it on the token’s official website or through trusted sources.

source: CharlesWang on X

3. Access Contract Details: Once you locate the token, click on its link to navigate to the detailed page. Here, you'll find various tabs including 'Transactions', 'Holders', and most importantly, 'Contract'.

source: CharlesWang on X

Verifying Source Code on Etherscan

Importance of Verified Source Code

A verified source code means that the smart contract’s actual code matches what is displayed on Etherscan. This transparency is crucial because it allows investors to review the contract’s functionality and detect any potential malicious behavior or hidden traps.

How to Check for Verification

To verify the source code of a smart contract on Etherscan:

1. Navigate to the Contract Tab: On the token's detail page, go to the 'Contract' tab.

2. Look for Verification Indicators: A verified contract will have a green checkmark or a similar indicator stating "Contract Source Code Verified". This signifies that the displayed code matches the deployed code.

3. Review the Code: Click on the 'Contract' tab to view the actual code. If the contract is verified, you will be able to read through the code to check for any suspicious functions or restrictions.

III. Analyzing the Smart Contract Code

Key Functions to Inspect

transferFrom, _transfer, and _update Functions

Smart contract code can seem intimidating, but focusing on a few key functions can make the task more manageable. For ERC20 tokens, the primary functions to examine are transferFrom, _transfer, and _update. These functions are critical as they govern how tokens are transferred between accounts, and modifications to these can indicate potential honeypot mechanisms.

- transferFrom: This function enables token transfers on behalf of another address. It’s essential in scenarios where an owner allows another address (such as a smart contract) to transfer tokens on their behalf. Any unusual restrictions or conditions added to this function can be a red flag.

- _transfer: This internal function is responsible for the actual movement of tokens from one address to another. Checking this function is crucial because honeypot tokens often include code here that blocks transfers under certain conditions, especially selling.

- _update: Present in the latest versions of ERC20 implementations, this function might handle state changes or other updates related to token transfers. Older ERC20 contracts might not include this function, so focus primarily on transferFrom and _transfer if it’s absent.

Differences in Older ERC20 Versions

Older ERC20 tokens might not follow the latest standards, so the absence of the _update function isn't necessarily a red flag. Instead, focus on the transferFrom and _transfer functions, ensuring they align with standard practices. Comparing these functions with those in trusted, standard implementations can help identify any discrepancies that might indicate malicious intent.

Using DiffChecker for Code Comparison

Preparing for Comparison

DiffChecker is a useful tool for comparing code snippets. Here’s how you can use it to analyze a token’s smart contract:

1. Open DiffChecker: Visit DiffChecker.com.

2. Copy Code Snippets: From the token’s contract on Etherscan, locate and copy the code for transferFrom and _transfer.

Performing the Comparison

1. Paste the Token Code: Paste the copied code snippets from the token’s contract into one side of DiffChecker.

2. Get Standard Code: Visit the OpenZeppelin GitHub repository to find the standard ERC20 implementation. Locate and copy the transferFrom and _transfer functions.

3. Paste Standard Code: Paste these standard functions into the other side of DiffChecker.

Identifying Red Flags

1. Compare Functions: Click the "Compare" button to see the differences highlighted.

2. Analyze Deviations: Pay close attention to any significant deviations. Look for conditions that could restrict token transfers, such as checks that differentiate between sender and recipient addresses or added requirements for transfers to occur. These modifications can indicate restrictions designed to trap tokens in honeypots.

Common Red Flags to Watch For

- Conditional Transfers: Code that restricts transfers based on specific conditions, such as only allowing transfers to certain addresses or preventing transfers when the recipient address is not on a whitelist.

- Function Modifications: Additional lines of code in transferFrom or _transfer functions that seem unnecessary or overly complex, potentially designed to confuse and hide malicious behavior.

- Approval Dependencies: Changes that tie transfer permissions to approvals or require additional confirmations, which could be used to block transfers without clear, legitimate reasons.

By meticulously comparing the token’s contract code to standard implementations, you can identify these red flags and avoid potentially malicious tokens.

IV. Gathering Community Insights and Using Tools

Consulting Community and Reviews

Using Social Media and Forums

Engaging with the cryptocurrency community on social media and forums can provide crucial insights into the legitimacy of a token. Here’s how you can effectively use these platforms:

1. Search for Token Discussions: Start by searching for discussions about the token on popular platforms like Reddit (r/cryptocurrency, r/ethtrader), Twitter, and Telegram. Look for threads, tweets, and messages where investors share their experiences and opinions about the token.

- Reddit: On Reddit, use the search function to find posts related to the token. Pay attention to comments that discuss difficulties with selling the token or other suspicious activities.

- Twitter: On Twitter, search for the token’s hashtag or handle. Monitor tweets from both users and influencers in the crypto space. Look for warnings or endorsements and assess their credibility.

- Telegram: Join official and unofficial Telegram groups dedicated to the token. Observe the discussions and ask questions to gauge the community’s sentiment.

2. Ask Questions:

Actively engage by asking questions in these communities. For example, inquire about any issues with liquidity or difficulties in selling the token. Often, experienced members will respond and share their insights.

3. Identify Reputable Sources:

Pay attention to comments and posts from reputable sources. Established influencers, developers, and long-term community members often provide valuable and trustworthy information.

Reading Reviews and Testimonials

Review sites and aggregator platforms can provide a wealth of information through user reviews and testimonials. Here’s how to leverage these resources:

1. Visit Review Sites:

Check platforms like CoinGecko, CoinMarketCap, and TokenSniffer for reviews and ratings of the token. These sites aggregate user reviews and often include a rating system.

- CoinGecko: Look for user reviews and the overall rating of the token. Detailed reviews can highlight specific issues investors have encountered.

- CoinMarketCap: Similar to CoinGecko, CoinMarketCap provides a platform for user reviews. Check for comments related to the ease of selling the token and any reported issues.

- TokenSniffer: This site offers automated analysis and user reviews. Pay attention to the sniff tests and user feedback.

2. Evaluate Testimonials:

Read through testimonials and detailed reviews to identify common themes. Be cautious of overly positive or negative reviews, as these could be biased or fake. Look for balanced reviews that discuss both the pros and cons of the token.

Using Honeypot Checker Tools

Tools for Simulating Transactions

Honeypot checker tools can simulate transactions to detect whether a token is a honeypot. Here’s a step-by-step guide on using these tools:

1. Visit Honeypot Checker Websites:

Sites like Honeypot.is, RugDoc, and Tokensniffer offer honeypot detection services. These tools simulate buying and selling the token to check for restrictions.

- Honeypot.is: Enter the token’s contract address into the search bar. The tool will simulate transactions and indicate if the token can be sold.

- RugDoc: Besides honeypot detection, RugDoc provides information on potential rug pulls and other scams. It offers an in-depth analysis of the token’s contract.

- Tokensniffer: This tool performs automated checks and provides a detailed report on the token, including honeypot checks, contract analysis, and risk ratings.

2. Simulate Transactions:

Follow the prompts on these sites to simulate buying and selling the token. If the token cannot be sold, the tool will flag it as a potential honeypot.

3. Review the Results:

Analyze the results provided by the tool. While these tools are helpful, remember that they are not infallible. Use them as part of a broader due diligence strategy.

Limitations of Honeypot Checker Tools

While honeypot checker tools are valuable, they have limitations that investors should be aware of:

1. False Positives and Negatives:

These tools may sometimes produce false positives, flagging a legitimate token as a honeypot, or false negatives, failing to detect a honeypot. This can occur due to sophisticated coding techniques used by scammers to bypass these checks.

2. Lack of Context:

Automated tools may not understand the context or the rationale behind certain code implementations. They might flag complex but legitimate features as suspicious.

3. Reliance on Current Data:

These tools rely on current data and may not detect issues arising from future updates or changes to the smart contract.

4. Comprehensive Analysis:

No tool can replace a thorough manual analysis and community research. Use these tools as a preliminary step, followed by a detailed investigation.

Combining Methods for Effective Detection

To effectively detect honeypot tokens, combine insights from community engagement, reviews, and automated tools:

1. Community Insights:

Use social media, forums, and review sites to gather anecdotal evidence and user experiences.

2. Automated Tools:

Leverage honeypot checker tools to perform initial assessments and identify potential red flags.

3. Manual Analysis:

Conduct a detailed review of the token’s smart contract using blockchain explorers and code comparison tools like DiffChecker.

V. Additional Tips for Safe Investing

Investing in cryptocurrencies can be lucrative but also comes with significant risks, especially for non-technical users. By following these additional tips, you can further safeguard your investments and navigate the crypto space more securely.

Interpreting Code Deviations and Red Flags

Understanding and identifying deviations in smart contract code can protect you from malicious tokens. Here’s how to interpret these deviations:

1. Understand the Baseline:

Familiarize yourself with standard ERC20 contract implementations, like those provided by OpenZeppelin. Knowing the baseline helps you spot unusual modifications.

2. Common Red Flags:

- Conditional Transfers: If the code includes conditions that restrict token transfers to specific addresses or under specific circumstances, it could indicate a honeypot.

- Approval Dependencies: Functions that require excessive approvals or permissions for transfers can be used to block sales.

- Complex Code: Overly complex code that seems unnecessary or obfuscates the transfer logic can be a sign of malicious intent.

3. Consult Experts:

If you encounter complex deviations that you don’t understand, seek advice from more experienced members of the crypto community or consult a developer.

Best Practices for Token Research

Comprehensive research is essential before investing in any token. Follow these best practices to ensure you’re making informed decisions:

1. Official Channels:

Always start with the token’s official website and social media channels. Verify the contract address and gather all relevant information from these primary sources.

2. Whitepaper Review:

Read the token’s whitepaper to understand its purpose, technology, and roadmap. A clear, detailed whitepaper indicates a legitimate project, while vague or overly technical documents can be red flags.

3. Team Verification:

Investigate the team behind the token. Look for information about their backgrounds, previous projects, and reputation in the crypto community. Transparent teams with verifiable identities are generally more trustworthy.

4. Audit Reports:

Check if the token’s smart contract has been audited by reputable third-party firms. Audit reports can provide assurance that the contract is free from vulnerabilities and malicious code.

5. Market Data:

Analyze the token’s market data on platforms like CoinGecko and CoinMarketCap. Look at the trading volume, liquidity, and price history to assess its stability and market activity.

Staying Updated with Security News

Keeping abreast of the latest security news and trends in the cryptocurrency space is crucial for safe investing:

1. Follow Security Firms:

Subscribe to updates from blockchain security firms like CertiK, PeckShield, and Trail of Bits. These firms often publish reports on new vulnerabilities and scams.

2. Crypto News Outlets:

Regularly read news from reputable crypto news websites such as CoinDesk, CoinTelegraph, and Decrypt. These outlets cover a wide range of topics, including security breaches and regulatory changes.

3. Community Alerts:

Stay active in crypto forums and social media groups. The community often alerts members about ongoing scams and security issues faster than traditional news sources.

Summary of Steps and Importance of Diligence

Investing in cryptocurrencies requires a diligent and methodical approach. Here’s a summary of the steps and why each is important:

1. Verify the Contract:

Use blockchain explorers like Etherscan to access and verify the token’s smart contract. Ensure the source code is verified to match the deployed code.

2. Analyze Key Functions:

Inspect crucial functions like transferFrom, _transfer, and _update for any suspicious modifications. Use tools like DiffChecker to compare the code with standard implementations.

3. Gather Community Insights:

Engage with the crypto community on social media and forums to gather anecdotal evidence and user experiences about the token.

4. Use Automated Tools:

Utilize honeypot checker tools to simulate transactions and detect potential honeypots. Remember their limitations and use them as part of a broader strategy.

5. Conduct Thorough Research:

Review the token’s official channels, whitepaper, team credentials, and audit reports. Analyze market data to understand its trading volume and liquidity.

6. Stay Informed:

Keep updated with the latest security news and trends to be aware of new threats and scams.

Conclusion

In the rapidly evolving world of cryptocurrencies, vigilance and thorough research are your best defenses against scams like honeypot tokens. By following these additional tips for safe investing, you can significantly reduce your risk and make more informed decisions. Remember, the key to successful investing in crypto is continuous learning and staying updated with the latest developments in the space. By adopting a diligent and cautious approach, you can protect your investments and navigate the crypto landscape with greater confidence.

About Orochi Network

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