Honeypot crypto scams operate in one of two ways, but the results are the same. You’ll lose your money if you fall into a honeypot. The more typical honeypot crypto definition refers to tokens that cannot be sold or transferred. Ultimately, the tokens cannot be withdrawn. Another more hands-on method involves sending tokens to a scammer’s wallet.
In this guide, we’ll explain the two types of honeypot crypto scams and explore what to look for to avoid becoming a honeypot victim. Let’s dig in.
What Is A Honeypot Crypto Scam?
A crypto honeypot is a scam that’s tempting to crypto users but ultimately results in them losing their valuable tokens, such as ETH or SOL. The scam can work in two ways. Both methods use a flawed contract. The more commonly seen honeypot involves tokens, often meme coins, sold on decentralized exchanges. However, a function of the token blacklists buyers, making the token impossible to sell again.
According to FTC estimates, crypto scams cost investors more than $1 billion annually. However, most scams go unreported within the crypto industry.
How Do Honeypot Crypto Scams Work?
Although another type of honeypot involves sending tokens to a scammer’s wallet, we’ll focus on meme coins with a malicious function because they are more common.
Let’s look at how crypto honeypot scams work in the steps below.
Create a Malicious Token
First, a scammer builds a token smart contract with a blacklist feature. This allows the contract creator to blacklist wallet addresses that buy the token. This process can be automated through smart contracts, and a whitelist function can allow for selling by specified addresses.
Another common tactic involves a high tax on token sales. The token creator earns the sales tax.
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Launch The Token On A Decentralized Exchange
Next, the scammer launches the token on a decentralized exchange (DEX). Sites like Dexscreener and Dextools are popular ways to shop for meme coins with liquidity on decentralized exchanges. That’s where honeypot tokens are most often found by unsuspecting victims.
Run DEX Ads Or Promote Via Social Media
To attract initial buyers, the scammers may run ads or shill the new coin on social media platforms or Telegram. Often, there may be a professional-look website, a Telegram group, or a fresh X account to make the coin look legitimate. The Telegram group and Twitter account disappear after the scam is complete.
Trigger Token Function
As customers trade ETH (assuming an ETH-based platform) for the token, the contract logs and blacklists their wallet address. Whitelisted addresses may sell, allowing the honeypot developer or team to sell tokens into the liquidity pool. This makes trading appear more natural, with minor pullbacks on a positive chart.
Dump Tokens Into Liquidity Pool
DEX tokens use a liquidity pool, which allows traders to swap ETH for the other token in the pool. The market cap grows as token buyers swap ETH for tokens, filling the liquidity pool with more ETH. However, the scammers are on a timeline. Auditing tools like GO+ Security, Quick Intel, and Token Sniffer scan token contracts. At some point, the token will be flagged as a honeypot.
The scammers then sell their token cache into the liquidity pool, depleting it. Another possibility is to just close the liquidity pool and withdraw the ETH. Many traders are aware of this, thus scammers may lock or burn the liquidity to make the token appear authentic.
The result is the same. The scam tokens are worthless, and the ETH is gone.
Note: In the other type of honeypot scam, a scammer gives the target the private keys to a wallet with miscellaneous (junk) tokens, pretending to be a new user who needs gas money to swap. The victim transfers a tiny amount of ETH from their own wallet to the wallet, believing that they can subsequently move the tokens themselves. When a modest trick is repeated frequently enough, the ill-gotten earnings pile up quickly.
Can You Get Out Of A Honeypot Crypto?
The best way to get out of a honeypot is to avoid entering one. First, let us explain a way to test the waters.
If you’ve already done your due diligence with token scanners and checked for locked or burned liquidity, you can make a small test purchase and then sell the token. It might not hurt to do this a few times to be sure you can sell when the time comes and to evaluate slippage. High slippage could indicate a sell tax on the token.
Sadly, there’s often no way to escape a honeypot. If the scammer pulls the liquidity, it’s over. If you are unable to sell owing to the token’s blacklist function, you can try sending the token to another wallet address under your control. However, in many circumstances, this strategy will not be effective.
Research the coin extensively and keep an eye out for community flags on sites such as Dexscreener. Once you’re in a honeypot, the money you lose will cover your crypto trading tuition. However, if you conduct your homework and test the waters with little purchases, rather than spending all of your finances, you may be able to avoid becoming a honeypot statistic.
Conclusion
Honeypots are one of the common rug-pull scams on decentralized exchanges carried out on unsuspecting users. While cryptocurrency trading on DEX platforms can be rewarding, DEX currencies also carry dangers and necessitate further investigation before investing. Use token screening tools, such as TokenSniffer, to assist you in making judgments. However, these tools aren’t perfect and may provide delayed results. It’s also wise to perform test transactions and evaluate user feedback from the community.
