A honeypot is a decoy system designed to attract and trap malicious actors. It mimics real software or network, tempting attackers to target it instead of legitimate systems. Blockchain cybersecurity researchers also use honeypots. But more often, a honeypot in crypto refers to a type of scam. 

A honeypot crypto scam is a deceptive smart contract designed to lure unsuspecting investors. Attackers make a malicious contract appear legitimate, often promising high returns or unique services. However, once users invest, the contract traps their funds and makes them impossible to withdraw. Let’s unpack how honeypots work and how not to fall for one. 

How Honeypots Work

The first step in any honeypot scam is luring in investors. The scammers create a project that looks and feels legitimate, often with a professional website, social media presence, and a seemingly experienced team. The project often promises high returns, unique features, or early access to cutting-edge technology. Presales, IDOs, and ICOs are particularly common among malicious actors. 

Scammers then promote the project via social media, online forums, and paid ads to attract investors and create a sense of community. Once users have invested their funds, the scammers activate a mechanism that prevents withdrawals. This could be a smart contract flaw, a rug pull (where the developers suddenly abandon the project), or a liquidity trap (where the liquidity pool is locked).

Unfortunately, setting up a honeypot in an Ethereum smart contract is a relatively simple process for anyone familiar with Ethereum development. The attacker doesn’t need any special skills beyond those required to interact with the Ethereum blockchain.

How Not to Fall Victim to a Honeypot 

Even experienced investors risk falling victim to a honeypot scam if they don’t exercise caution. Here are some tips to keep your funds safe:

• Be wary of unrealistic promises: Avoid projects promising excessively high returns with minimal risk or guaranteed profits.
• Check the smart contract code: Use tools like Etherscan or BscScan to analyze the smart contract code and make sure the contract's logic aligns with the project's stated goals.
• Avoid FOMO: Don't rush into investments based on hype or fear of missing out. 
• Use trusted platforms: Trade on well-established and regulated cryptocurrency exchanges and store your funds in legitimate wallets. 
• Diversify: Don't allocate a significant portion of your portfolio to a single project.

Real-Life Examples of Honeypots

Honeypot scams have become increasingly common lately. The Squid Game token, for example, gained significant attention due to its association with the popular Netflix series. However, the developers suddenly abandoned the project with millions of stolen dollars, leaving investors with worthless tokens.

Another notable example is Bitconnect. This lending platform promised high returns but eventually collapsed, stripping investors of over 2.4 billion dollars. 

OneCoin case is similar to Bitcoinnect’s. It was a pyramid scheme that claimed to be a cryptocurrency but was ultimately revealed as a fraud. Before ceasing operations in 2014, OneCoin stole over 4 billion dollars from millions of victims. 

It’s worth noting that not every crypto fraud is a honeypot. For example, the FTX & Alameda case involved the theft of user funds, but the platform was conducting legitimate operations and didn’t use deceptive smart contracts. 

Benefits of Honeypots 

It may be strange to look for pros in a scam. But honeypots can also be used for legitimate purposes. 

Cybersecurity researchers may use honeypot systems to gather valuable data on real-world attacks and develop countermeasures. They develop a project with intentional vulnerabilities to lure attackers and study their behavior. 

Cybersecurity honeypots are typically deployed in a demilitarized zone (DMZ), a network segment that separates external systems from internal networks. This isolation protects the main network from potential attacks. And since legitimate users have no reason to interact with a honeypot, any communication with it is considered hostile. 

Researchers monitor the honeypot passively, recording all interactions and activities. This includes network traffic, login attempts, and any commands executed by attackers. The collected data is then analyzed to identify patterns and potential indicators of compromise (IOC).

Conclusion 

Honeypots are a double-edged sword. While they can be used legitimately by cybersecurity researchers to study and understand attacker behavior, they are also a common tool for scammers to lure unsuspecting investors.

That’s why educating yourself on cybersecurity best practices is crucial. Always do your due diligence before investing in new projects and be wary of unrealistic promises.