A honeypot crypto scam employs a malicious smart contract to entice unsuspecting victims with the prospect of substantial returns or rewards. The scheme’s ultimate intent is to swindle the victim’s FUNDS. 

A honeypot is a scam used in the crypto industry to trap victims and steal their assets or sensitive information

HERE'S a BREAKDOWN OF WHAT YOU NEED TO KNOW:

How they work:

Honeypots often involve a fake crypto project with promises of high returns. The smart contract is designed to make it incredibly difficult or impossible to sell the tokens you've purchased, effectively locking your investment.

The goal:

The goal of the scam is to have investors purchase the tokens, then prevent them from withdrawing their investment, leading to a rug pull.

Recognizing the signs:

AdGuard suggests that you can identify honeypot scams by analyzing smart contracts, checking liquidity and trading conditions, and assessing project transparency.

Protecting yourself:

Always be skeptical of projects with extremely high returns and ensure you can reliably verify the smart contract code and the project's legitimacy.

Reporting scams:

If you believe you've encountered a honeypot scam, report it immediately to blockchain explorers, scam databases, and relevant authorities.

HOW DOES IT WORK? 

A honeypot scam happens in three steps. First, the bad actor deploys a smart contract that seems to have a design flaw that allows any user to extract the contract’s tokens. This is the “honeypot,” preying on users’ instinctual greed. What’s the catch? The user must first send a certain amount of cryptocurrency to the contract. 

Secondly, the unwitting users transfer the required cryptocurrency deposit and attempt to exploit the vulnerability to cash out. However, a second vulnerability prevents the victims from withdrawing their initial deposit and the contract’s stash. And finally, the attacker cashes out all the funds from the contract, including the victims’ deposit.

For example, Dechat mistakenly posted a honeypot smart contract link on Feb 26, 2024, on their social media platforms, which exposed users to financial loss. The protocol, however, immediately rectified the error.

Alternatively, the attacker first contacts other crypto users via social media platforms. They pose as novice users with substantial crypto funds requiring help cashing out or transferring. The bad actor promises the victim a portion of the said tokens and even provides their private keys to earn the victim’s trust and appear naive. 

While the victim finds a substantial amount of tokens that have significant value, they cannot be utilized to cover transaction costs. Hence, the victim is compelled to deposit the native token of the blockchain the wallet operates on to withdraw the tokens.

 Unfortunately, the funds are instantly redirected to another wallet using automated scripts once they reach the wallet.