ERC-20 Honeypot Scams: A Beginner’s Guide and Advanced Detection Techniques

4 min readApr 10, 2024

The decentralized finance (DeFi) space offers exciting investment opportunities and attracts malicious actors. One common scam targeting crypto users is the ERC-20 honeypot.

This article delves into ERC-20 honeypot scams, explaining how they work and how you, as a user, can protect yourself. We’ll cater to beginners and advanced users by providing clear explanations and advanced detection techniques. This article also explores the mechanics of ERC-20 honeypots, delving into their deceptive tactics and offering strategies to stay safe, catering to beginners and advanced users.

Imagine a beautiful honey jar attracting unsuspecting flies. An ERC-20 honeypot operates similarly, luring users with a seemingly legitimate token, only to trap their funds once invested. Scammers create a seemingly legitimate ERC-20 token with a fake project behind it. They might even list it on a DEX with some initial liquidity to build trust. However, this token has a malicious twist: the smart contract code contains a hidden function that prevents users from selling the token back to other cryptocurrencies once they buy it.

How Does an ERC-20 Honeypot Work?

Here’s a breakdown of the typical honeypot scam:

Deployment

The scammer creates an ERC-20 token with a website and social media presence to make it appear legitimate. They might even create a fake whitepaper and development team.

Liquidity Pool Creation

The scammer adds initial liquidity (e.g., ETH paired with their token) to a DEX to create an illusion of a functioning market.

Promotion and Hype

The scammer aggressively promotes the token through social media, influencers, or paid advertising, highlighting potential gains.

The Lure

Attracted by the hype and potential returns, users buy the token with their ETH or other crypto.

The Trap

A hidden function in the smart contract code is triggered upon purchase. This function prevents users from selling the token back or exchanging it for other cryptocurrencies, effectively trapping their funds within the contract.

The Drain

The scammer drains the initial liquidity pool, leaving trapped user tokens worthless.

Advanced Honeypot Techniques

Savvy attackers may employ additional tactics:

Obfuscated Code

The attacker deliberately obfuscates the smart contract code, making it difficult to understand its functionality and detect the malicious trap.

Fake Transactions

The attacker might use bots to create a fake trading volume, enhancing the illusion of a legitimate token.

How to Spot and Avoid ERC-20 Honeypots (Beginner Tips)

Even beginners can employ these strategies to avoid honeypot scams:

Do Your Research

Always research the project thoroughly before investing. Look for red flags like vague whitepapers, anonymous teams, or unrealistic return promises.

Beware of Hype

Excessive hype surrounding a new token is a telltale sign. Legitimate projects focus on utility and a strong community.

Check with Experts

Use security tools like Olympix or others to analyze the smart contract code and identify potential vulnerabilities. You can also get involved in various online Web3 security communities on Discord and Telegram to make informed decisions.

Use Reputable Platforms

Trade tokens on established and well-respected DEXs with robust security practices.

Advanced Detection Techniques (For Experienced Users)

Experienced users can take their defense a step further:

Scrutinize the Smart Contract

Manually analyze the smart contract code, looking for functions restricting token selling or transfer. Tools like Etherscan can help view contract source code.

Monitor On-chain Activity

Monitor the token’s transaction history. Look for unusual patterns or sudden spikes in trading volume that might indicate manipulation. Remember to look at whale wallets for potentially suspicious behavior.

Liquidity Pool Analysis

Investigate the liquidity pool associated with the token. Look for shallow liquidity pools (those with a low value) as a potential red flag.

Stay Updated

Educate yourself about common scams in the DeFi space. Keep up-to-date with security best practices and honeypot detection techniques.

Staying Vigilant in the Wild West of DeFi

The DeFi space is constantly evolving, and new scams might emerge. However, by employing these strategies, staying vigilant, and educating yourself, you can significantly reduce your risk of falling victim to an ERC-20 honeypot scam. Remember, if something seems too good to be true, it probably is. Don’t be afraid to leave an investment opportunity if it raises any red flags.

About Olympix

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