The blockchain industry is filled with promises of quick and easy money. It is crucial to identify which projects are safe and which ones are destined to fail after three months. This article presents eight methods to help traders avoid effective scams.
1. Start with the basics
To verify the legitimacy of a token, start with the easiest accessible methods. For example, use Google search and Twitter to research the token and its team, check for any warning signals or dangers, and look for reliable sources such as official websites, news articles, and verified social media accounts.
Check for social media warning signals
Verified Twitter accounts can often help prove the legitimacy of a project. Additionally, participating in token discussions can provide insights into the community’s opinions and views.
Be cautious of projects with a large number of followers on social media but low engagement. Automated comments from fake accounts should also be seen as a warning signal. If all the comments are “This is a great project” and “Moon is coming,” be cautious.
Check token addresses in Google search
If a clear homepage, whitepaper, or obvious token purpose cannot be found through an internet search, it is likely a scam. When searching for token addresses, it should be easy to find blockchain explorer links, official websites, and whitepapers. If not, consider it a warning signal.
Additionally, be aware that Google ads are often a free zone for scams. Do not click on the top ads in Google search results. Make sure you are visiting the official website and avoid clicking on wallet drainers or other hacker software.
2. Verify the code on Etherscan
Access the blockchain explorer of the chain you choose and check if the source code has been verified. For example, on the Ethereum blockchain explorer Etherscan, it should look like the image below. If the code is not verified, it should be a clear warning signal. If the code is not verified, you may have encountered a scam.
Why don’t scammers verify their code directly?
Because once the source code of a contract is public, everyone can know the intentions behind the contract. It could be a ridiculous token system or a way for developers to steal all your tokens. However, does this mean that every unverified contract is a scam? Not necessarily, but it is a very serious warning signal.
3. Check the comments section on Etherscan
This part is straightforward, as most blockchain explorers have a comments section. Most of the time, there are no comments, but if a project is a scam, you may find a group of angry people in the comments section. So be sure to click and check. If someone says it’s a scam, there’s a 99% chance it is. If you are a victim of the project, please leave a comment as well.
4. Check DappRadar’s blacklist
You can compare the token blacklist compiled by DappRadar on GitHub, and if the token address appears on the list, it is a scam.
5. Check token details in token indexes
If you cannot find the token on CoinGecko or DappRadar’s token indexes (or similar token price trackers), it is likely a scam. If you see a warning like the image below, proceed with caution:
All legitimate tokens share their information with token index websites for verification. However, platforms like CoinMarketCap and CoinGecko have specific criteria that need to be met. Therefore, not all tokens, whether legitimate or not, will be automatically listed on these token index platforms.
6. Check how many exchanges have listed the token
If a token is only traded on a few decentralized exchanges (DEX), it may be a scam. Listing on centralized exchanges requires KYC and additional trust, and the larger the exchange, the better the reputation of the listed token.
However, tokens listed only on DEX are not necessarily scams. Some projects do not require high trading volume, and some projects target Web3 users rather than token traders.
Nevertheless, tokens listed only on DEX are a riskier investment, and you are more likely to encounter scams. The image below shows a token that is only used on DEX on the left, and a token that can be used on multiple CEX on the right.
7. Check the liquidity in the token balance pool
Before investing in a token, it may be necessary to check the availability of overall demand and liquidity. Checking the liquidity of a token on platforms like Uniswap V2 or other DEX is straightforward.
Liquidity refers to the amount of cryptocurrency or tokens locked in a smart contract, allowing users to buy and sell assets through (decentralized) exchanges. If the liquidity is below $100,000 or rapidly declining, you may have encountered a scam.
When using DEX, be sure to check basic on-chain activities, including:
Trading volume
Number of transactions
Number of independent active wallets interacting with the smart contract—users connecting to DEX using Web3 wallets.
If any of these appear unusual, do some further investigation.
8. Use third-party analysis tools
Here are some token analysis tools:
Smell Test: Automatically audits tokens. The lower the score out of 100, the more likely it is a scam.
Honeypot: Honeypot is a smart contract deliberately inserted with obvious programming flaws. When attackers exploit the flaw, another hidden code is activated to counter-attack the attacker. Honeypots should be avoided, whether or not you intend to become a crypto hacker.
DEXtools: Records real-time token prices and helps you assess the true value of tokens in real-time.
Scammers exist both in the blockchain and the real world. By following these recommendations, you should be able to avoid fake tokens designed to scam money.
