An investor was exploring an investment market in search of investment opportunities. While walking around, he entrusted 100$ to a merchant. When he returned, the merchant had absconded with the deposits of all the investors, including his. The investor then deposited another 100$ with a different merchant after quickly reviewing the deposit contract, which had a fair interest rate. Upon returning to collect the interest, he found out that the contract allowed the merchant to alter the terms at their discretion, which resulted in the investors being deprived of their interest. He then noticed that three traders were calling out to buy shares of their respective companies on the stock exchange. He invested 100$ in each of the companies. After a while, he discovered that the traders had transferred all the purchase amounts of the shares to their bank accounts in the Cayman Islands and the islands of St. Vincent and the Grenadines. Next, he heard another merchant inviting everyone to buy one of his rare coins as he had only a hundred of them. The investor purchased several coins, but he later found out that the merchant had a large stock of this rare coin. Whenever he sold ten coins, he compensated the missing amount of stock. As a result, the value of the coin decreased, and it was no longer rare. Finally, he came across another trader who was seeking presale participation for his company. The trader withdrew all the money invested in the presale, leaving the company established without any capital. The trader then asked the investors to reinvest and buy shares.
The most important means of fraud and deception
All of the above-mentioned examples occurred in the world of cryptocurrency, where the most important methods of fraud, manipulation, and exploitation are summarized as follows:
Start directly at the central exchange:
Offering the cryptocurrency directly on the central exchange is not considered fraud or deception, but it is exploitation and appropriation of other people’s money, because the cryptocurrency team controls all the stock of the currency offered for circulation, and when the currency is available to buy on the exchange, the cryptocurrency team gets most of the buyers’ money, especially at the beginning of the trading, this will continue until the currency reaches a level where most buyers offer their currencies for sale, in which case there will be other sellers alongside the cryptocurrency team. However, the amount of profit achieved for buyers cannot be compared with what the cryptocurrency team, because the members of the team sell a cryptocurrency whose real value is zero, and the number of cryptocurrencies under their control is enormous, and whenever they enter a central exchange, they will send the currencies in the hope of selling most of it to the exchange buyers. Offering a cryptocurrency directly on a central exchange is not considered fraud or deception, but it is still exploitation and appropriation of other people's money. This is because the team behind the cryptocurrency controls all the stock offered for circulation. At the beginning of trading, the team will get most of the buyers' money. This situation continues until the currency reaches a level where most buyers offer their currencies for sale, at which point there will be other sellers alongside the cryptocurrency team. However, the amount of profit achieved by other investors cannot be compared with what the cryptocurrency team makes. The team is selling a cryptocurrency that has no real value, and they have a large number of other cryptocurrencies under their control. When they enter a central exchange, they send the currencies with the aim of selling most of it to the exchange buyers. The cryptocurrency team can carry out ill-considered sales operations when the price of the currency rises, which is considered to be a nightmare for investors. The price of the currency will fall quickly, and confidence in the coin will decrease. This situation will result in a loss for those who purchased the currency at a medium or high price. Unfortunately, it's unlikely that the price will rise again unless the currency owners return the funds they obtained at the expense of the buyers or if they can attract a large number of new buyers with greater purchasing power than the amount that was sold. In this case, there is no possibility of a return on investment.
Cryptocurrencies are usually created in decentralized systems, starting from the most significant currency, Bitcoin, to meme currencies that are created for fun. However, this does not imply that currencies created on decentralized platforms are always safe. A lot of things need to be checked to ensure their safety. If a currency is proven fair and safe, moving it to a central exchange can generate profits for all investors. But, there may be exceptional cases of the buyers’ funds being exploited in cryptocurrencies.
In the world of digital currencies, central exchanges depend on supply and demand, just like in the traditional stock market. This means that any price drop that occurs on the central exchange can cause a significant decline if there is no strong liquidity pool to support the currency in the decentralized system. However, the liquidity pool in the decentralized exchange can absorb and mitigate such drops in price.
Some may ask, how can a cryptocurrency be accepted by centralized exchanges like Whitbit or XT before the cryptocurrency community is built and there are thousands of holders with a high-value liquidity pool? The answer is that these platforms are not responsible for how the cryptocurrency was created and the credibility and seriousness of the team. Rather, there are fees that when paid, the currency is released on the platform. For example, these fees are about 20,000$ for the Whitbit exchange,15,000$ for the Hotbit exchange, and $7,000 for the CoinTiger exchange. Noting that this does not apply to the popular exchanges such as the Binance, as these exchanges are very selective, and their fees are very high. However, the above does not apply to cryptocurrency that have a large number of traders on the decentralized exchanges, as in this case the central exchanges automatically add them to the platform.
Some people may wonder how a cryptocurrency can be accepted by centralized exchanges like Whitbit or XT before the cryptocurrency community is built and there are thousands of holders with a high-value liquidity pool. The answer is that these platforms are not responsible for the creation of the cryptocurrency or the credibility and seriousness of the team behind it. Instead, some fees need to be paid for the currency to be released on the platform. For instance, the fees for the Whitbit exchange are around $20,000, for the Hotbit exchange they are $15,000, and for the CoinTiger exchange, they are $7,000. It's worth noting that this doesn't apply to popular exchanges like Binance, as these exchanges are very selective and their fees are very high. However, this also doesn't apply to cryptocurrencies that have a large number of traders on decentralized exchanges, as central exchanges automatically add them to the platform. Therefore, we place the process of starting a cryptocurrency directly on the central exchange at the top of the pyramid of means of exploitation.
Not locking the liquidity:
Investing in tokens directly on the central exchange is generally safe, as the tokens are held securely in the exchange's wallet. If demand for the token increases, its price can rise. However, it is considered a major mistake in the crypto world to deal with a token whose liquidity is not locked. This is because the token team can withdraw its liquidity at any time, resulting in all investors' funds being withdrawn (known as a "Rug Pull").
Liquidity must be locked permanently for all tokens available in the liquidity pool; simply locking liquidity is not sufficient. It is important to research and verify the duration and amount of locked liquidity.
Crypto wallet distribution:
All the cryptocurrency available in the liquidity pool may be locked for a long period. However, this alone is not enough to prevent fraudulent crypto distributions to the team's wallets, which can lead to a result similar to withdrawing liquidity (Rug Pull). Some crypto projects allocate large percentages to the team and/or the project wallets, which we believe should not exceed a maximum of 5%. Additionally, the team must provide clear justifications for how and when they use these wallets. The team's wallet must also be locked for a reasonable period of no less than five years. The crypto sent to the team wallets is considered free crypto without any cover, but it can be exchanged with the investors' money by swapping them in the liquidity pool. Using even 1% of the crypto in these teams' wallets can significantly reduce the price.
Therefore, one effective method of deception in the crypto world is the preferential distribution of cryptocurrency.
The possibility of creating new cryptocurrency:
When developing a smart contract for a token, it is possible to add a code that allows for the creation of new tokens at no cost to the owner of the token smart contract. These tokens can then be sold to investors without any effort or limit, resulting in potentially fraudulent activity. Therefore, it is crucial to ensure that this technique is not present when conducting an audit of a smart contract.
To detect this fraudulent method, one can go to the token contract page and examine the transactions. If an icon with "Mint" written inside it is found, this indicates the presence of this technology in the token contract. The image below provides an example of this "Mint" technology.
Presale:
The following text explains the Presale process in the crypto world and highlights the importance of transparency in this matter. The Presale is a common practice used to provide sufficient liquidity to the pool due to the lack of financial solvency of the crypto team. It is not considered fraudulent, but it can be characterized as such if the crypto obtained from the buyers is not transferred to the liquidity pool. In such cases, the buyers' funds are stolen for the benefit of the crypto team. The Presale process relies on a smart contract that manages this process and must include an equation to return buyers' funds if the number of cryptos required is not reached.
If the cryptocurrency is created in its blockchain (Coin), and the Presale is made to cover the cost of creating the Blockchain, the team must clarify the amount of money received and the expenses spent. An independent financial company should prepare a financial report to examine this process. The cost of creating blockchains and programs can start from $10,000 up to $1,000,000, depending on whether the system and codes are created from scratch or copied from previous systems. If the blockchain is based on the codes of previous systems, it will not be expensive. Therefore, doing a Presale to establish a blockchain is similar to a traditional Presale for a company's establishment. Clear financial reports will provide confidence and transparency in this matter.
In summary, transparency is crucial in Presale processes, whether it is for a "Token" or a "Coin", to ensure that the buyers' funds are not stolen, and the Presale provides the liquidity needed to the pool.
Private sale bonus:
Private sales are not considered fraudulent or deceptive, but they can create a gap between investors, violating the principle of equality between buyers that is essential for the cryptocurrency system to function properly. This is especially true for decentralized exchanges. If the cryptocurrency founders want to maintain equality and not favor one group over another, they should limit private sales to no more than 5%. Additionally, the funds obtained by the team through private sales should be added to the liquidity pool and not considered as a reward for them. Failure to do so could harm all investors. It is also important to lock the digital wallets that benefited from private sales, as these individuals obtained the cryptocurrency at a lower price and may achieve higher profits compared to the real crypto community that supports the project. Lastly, the crypto team should be transparent and share the addresses of all wallets that acquired the crypto during private sales so that real investors can easily analyze them.
Crypto trading pause:
In the world of cryptocurrencies, the idea of stopping trading is generally frowned upon and deemed as a cause for concern among investors. One of the most important aspects of trading in cryptocurrencies is the ability to freely buy, sell, and transfer crypto without any restrictions. Interfering with this process in any way is viewed as an infringement on the rights of investors, and it can also enable other forms of fraudulent activity.
Use Anti-Whale mechanisms in a harmful way:
Despite its benefits, the anti-whale function can be used in a way that harms investors. This technology allows for changes in ownership percentages if the contract is not relinquished. These changes can be made in a way that harms buyers and limits their trading freedom by excessively reducing the percentage, such as by preventing transactions that exceed 0.01% of the total supply. For this reason, most fraud auditing keeps the anti-whale function in the red box.
Use of the blacklist function:
The smart contract can implement a blacklist feature that prevents owners of listed wallets from disposing of their purchased cryptocurrency.
Not renouncing the smart contract:
We purposely brought up this point later, even though it's essential because if the ownership of the smart contract is not relinquished, there is a constant danger of introducing any fraudulent or deceptive means mentioned above. As a result, despite the significance of the previously mentioned points, they must be confirmed by surrendering ownership of the smart contract after ensuring that the contract is safe and its codes are error-free. It is preferable to give up ownership of the contract after having it audited by a trustworthy company.
Cryptocurrency currency imitation:
One common method of fraud involves creating a new cryptocurrency that closely resembles an existing one, so that buyers may mistakenly purchase it due to the similar names. For example, scammers may create a token named "AMMAL", "AMAAL", or "AMAL Token" to imitate the legitimate cryptocurrency called "AMAL". They then promote the fake cryptocurrency on social media to attract investors. To avoid falling for such scams, it is crucial to double-check the accuracy of the token contract address before purchasing tokens on decentralized platforms.
Misleading media:
There have been instances where founders of Arab tokens made unrealistic claims about the value of their cryptocurrency on social media. In one such instance, the founder of a token posted a video on Instagram, claiming that the currency would reach two or three dollars, and later claimed that it would reach a thousand dollars, but he would be willing to accept 10 dollars. Similarly, the founder of another Arab token also made claims that his token would reach a thousand dollars. Such claims are unrealistic, as the total supply of the first token is 10,010,600,000,000 and the total supply of the second token is 100,000,000,000. To put this into perspective, the amount of dollars available in the world is around 60 trillion, which means that fulfilling the founders' claims would require bringing in dollars from another planet.
This kind of exaggerated media content is exploitative, as some people may be influenced by such claims and invest their money in cryptocurrency with the hope of achieving significant financial returns. In some cases, social media influencers may be involved in this deception, where they receive money or cryptocurrencies in exchange for promoting the token and encouraging people to invest in it.
How to detect methods of fraud, deception, and exploitation?
The world of cryptocurrency is unique in that it is built on open sources, which means that it is impossible to conceal any fraudulent or deceitful activities, regardless of the skills of the currency team. This is because most things can be audited on the smart contract page of the currency. Even transfers that occurred during the Presale or Private Sales can be detected by reviewing the transactions made in the smart contract.
In this article, we have discussed the most common ways of deception and exploitation in the world of encrypted digital currencies. It is important for those who deal with these currencies to be aware of the risks they may face and to take measures to protect themselves from falling into the trap of fraud and exploitation.