The crypto industry is certainly no stranger to scams of every sort. There are many methods that cybercriminals currently use to access crypto holdings, including those known as “honeypots”. But what exactly is a crypto honeypot scam, and are they dangerous?
What Is a Honeypot Scam?
Honeypot scams (not to be confused with “honeytrapping”) can come in a number of forms. But in any case, they lure in victims with the false promise of big profits. As the name suggests, honeypot scams appear as a big pot of honey, i.e a pot of cash, but are far from that in reality.
But there’s something very interesting about honeypots that separates them from many other crypto-based scams. While most scams outright target innocent people who have no ill will, honeypots rely on the targeted user have at least some malicious intent themselves.
This is because the original scammer will often pose as an innocent crypto beginner looking for help with their transactions. The actual victim, in this case, believes that they have the upper hand. So, how does this work?
A Honeypot Example
Let’s use a simple example to break this down. Say Person A (the attacker) messages Person B (a potential victim) claiming to be a crypto novice who needs help using their wallet. Maybe they don’t know how to receive funds, or they’re trying to move preexisting funds to another wallet, a bank account, a crypto exchange, or otherwise.
Under the guise of naivety, Person A will send over the seed phrase of the wallet, indicating that they think this information will help Person B aid them in moving the assets. Seed phrases essentially give you access to a wallet, so sharing them with others, especially strangers, is a bad idea. In this case, the cybercriminal is hoping that the potential victim is aware of this possible security breach.
Person B may look at this seemingly clueless crypto trader’s message and think, “with that seed phrase, I can access the wallet and its funds.” A kinder user would probably ignore this message, or maybe even advise the sender that sharing a seed phrase is dangerous. But if the recipient is a little more nefarious, they could take the bait, believing that they’re about to hit the jackpot.
However, in reality, Person A is still in the driver’s seat.
When Person B accesses the wallet, they may see that there is a holding of tokens stored there that is now seemingly up for grabs. Let’s say the tokens are Ethereum-based (using the ERC-20 standard). However, they are not Ethereum coins (ETH), but a token built on top of the Ethereum blockchain. At this point, Person B will realize that they need some gas money to conduct the transaction.
“Gas” is the computing power used by many blockchain networks.
When using such a network, users must pay a gas fee, therefore contributing to the huge amounts of energy being used to support the entire chain. On the Ethereum blockchain, ETH, the native token, is used to pay gas fees.
Because the ERC-20 tokens in the wallet here are not ETH, Person B will likely soon realize that, in order to withdraw the funds (therefore conducting a transaction), they will need a little ETH within the wallet to pay the gas fee. No problem, right? Gas fees can be minimal, so just sending over a small amount of ETH will do no harm.
It’s this small amount of ETH that Person A, the original scammer, has their sights set on. Person B, believing they’re still sneaking a crypto holding out of a naive user’s wallet, will send a little ETH to the wallet address, ready to pay the gas fee when they withdraw the entire holding.
But as soon as Person B sends a small amount of ETH, it is immediately withdrawn by Person A and sent elsewhere. At this point, Person B stands as the victim, as they have been scammed out of their ETH.
What Is the Other Kind of Honeypot Scam?
While honeypot scams commonly involve interactions with malicious wallets, they can also involve the use of smart contracts.
Smart contracts are programs used by numerous blockchain networks to automatically facilitate transactions, therefore cutting out any intermediaries or third parties. Smart contracts will only execute when a set of pre-determined parameters are met, and can increase the efficiency of blockchains overall.
But this technology can also be leveraged maliciously for financial gain.
In this scenario, a cybercriminal will use a smart contract that looks easily exploitable. Maybe there looks to be a bug in the code, or some kind of backdoor to the crypto holdings of the contract. Again, an illicit individual will look at this and see an opportunity, not realizing that they, themselves, are about to get scammed.
For example, Person A (the attacker) may use a smart contract honeypot to trick Person B (the victim) into thinking they can siphon funds out of it. If Person B thinks they can exploit this smart contract, they’re already in the hands of the attacker.
To interact with and use this smart contract, Person B must first add some of their own money. Usually, this isn’t a very large amount, so Person B may think nothing of it. But, as was the case with the first honeypot example used here, Person A, the attacker, is after this small transfer.
Once Person B sends over this small holding, it will likely become automatically locked within the contract. At this point, only the smart contract’s creator, Person A, can move the funds. Now, Person B has been scammed out of their money, and has therefore fallen victim to the honeypot.
How to Avoid Crypto Honeypot Scams
To keep yourself, and your funds, away from crypto honeypot scams, the best thing to do is to conduct yourself ethically as a crypto trader and investor. As tempting as it may be to grab a vulnerable pot of crypto, this is theft, and, if it turns out there is no honeypot, you’re likely taking the money of another harmless trader.
In the case of smart contract honeypots, you may simply think that you’re leveraging someone else’s mistake to legally make a profit. However, it’s worth noting that in the crypto industry—just like everywhere else—if something seems too good to be true, it probably is.
Crypto Honeypots Capitalize on Crypto Greed
Many financial scams out there today rely on victims’ desire for money, and the case is no different for crypto honeypots. These exploits target users who are happy to bend, or totally break the rules in order to make a profit. So, stay on the straight and narrow in your crypto dealings, as there may be a cybercriminal out there waiting for you to slip up.
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