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Blockchain security & scams
Despite all the good people have done in the crypto space, there are always a few sinister individuals aiming to spoil things for the rest of us. In this chapter, we will take a quick look at some of the attacks and scams and discuss how they are carried out, how to spot and avoid them, and what you can do to protect yourself.
Forking attacks
Like all systems, blockchain technology has weaknesses and vulnerabilities.
A 51% attack is a type of forking attack on the blockchain, usually executed by a group of miners who control at least 51% of the network’s hash rate.
As hackers make up the majority in control of the network, they can prevent other miners from completing blocks. This type of attack also allows the attackers to double-spend the coins. They can send a copy of the transaction to make the spending look legitimate or delete the transaction and, basically, just steal the cryptocurrency.
For larger coins like Bitcoin and Ethereum, this is less of a problem, given the number of miners and nodes already on the network. It’s virtually impossible for such an attack to be carried out. But it remains a threat for smaller coins, especially for ones using PoW rather than PoS. So, when you’re researching and selecting an altcoin to invest in, it is worth keeping this in mind.
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A forking attack is an attack on the main — or the most trusted — chain (MTC) of a network so that intruders can launch an alternative chain to gain benefits.
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Pool cannibalization
Pool cannibalization is another way in which some miners may cheat the system. This involves miners dishonestly withholding the blocks they verify and receiving a larger share of the pool in comparison with the rest of the miners in that pool.
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Giving an example is the best way to illustrate pool cannibalization. Let’s say the total hashrate of Bitcoin is 100, your hashrate is 30%, and the mining reward is 1 BTC. Your share of the mining reward is 0.3 BTC.
You decide to add more equipment to your rig, thus getting an extra 1% hashrate. If you use a standard mining strategy, the revenue gain for your added 1% is 0.0069 BTC. But if you distribute that 1% across all other pools and withhold your valid blocks, you will receive your rewards and your revenue gain, for that added 1% hashrate increases from 0.0069 BTC to 0.0098 BTC, making it more profitable.
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Rug pulls / Pump & dumps
Like in traditional trading, there are scammers out there who are also looking to make a quick buck by any means necessary.
One example of such scams was the Squid coin story. A new cryptocurrency called Squid Game, named after the popular Netflix series, suddenly appeared, offering investors a chance to recreate the competition featured in the series.
Given the show’s popularity, it wasn’t long before investors started piling in, and the token’s price rapidly grew. Within a couple of days, the price per token shot up from $0.03 on 10/27/21 to $2,856.64 at midday on 11/01/21.
However, just over an hour later, on 11/01/21, the price plummeted back down to $0.0008. This was another case of a classic rug pull scam.
If investors had carried out their independent analysis on this project, they would have noticed many red flags, such as fake team members and partnerships, the inability to sell the tokens, and basic spelling mistakes in the whitepaper.
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A rug pull, the most popular type of scam in the decentralized finance (DeFi) space, involves developers abandoning a project and taking investors’ money. ________________________________________________________________________
If you get caught by a rug pull scam, the chances of getting your money back are pretty slim. To prevent this situation, learn how to spot a rug pull and be wary when investing in any new cryptocurrencies.
Here are a few steps to spot a potential rug pull scam:
- Tip 1: Check the background of the team and their social media pages. Find out as much information about them as you can. You want to examine how solid their background and reputation are. If the developers are anonymous or if they don’t have any background in the industry, it’s a red flag, and you should proceed cautiously.
- Tip 2: Check the project’s social media channels, chats, and communities. This will help you understand if the interest and enthusiasm of their supporters are real. If people are banned, muted, or deleted from such groups for asking hard questions, it’s a serious red flag.
- Tip 3: Make sure that any project you’re considering investing in has been audited by a trusted third party. Also, read the audit too! Just because the company claims that it has been audited doesn’t really mean anything. The audit could still say that this project is a potential scam or that it isn’t safe.
- Tip 4: Test your ability to sell your funds. Some projects contain hidden code that prevents investors from withdrawing their funds from the liquidity pool. It is always wise not to invest a lot of money until you’re certain you can sell the coins you purchased.
- Tip 5: Check the distribution of tokens. This is another red flag if just a few people hold significant amounts. It could mean that a group of whales could dump their investments and crush the token’s price. This could be a sign of a potential pump & dump scam. Check the token’s distribution and concentration using a block explorer like Etherscan or Blockchain Explorer.
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Decentralized finance (DeFi) is a system where financial products become available on a public decentralized blockchain network.
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A pump & dump is a type of securities scam where a coin’s price is boosted by false, misleading, or greatly exaggerated statements. This kind of scam normally targets cheap, small-cap tokens.
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Social media & phishing scams
Some hackers also use fake social media pages of celebrities and email phishing scams to steal crypto. One such example was the fake Elon Musk Bitcoin giveaway, which was advertised on Twitter in early 2021. We should always approach links to such giveaways and promises of immediate 2x or 3x returns with caution. If not, we can end up like one German man who lost 10 Bitcoins to this scam.
A lot of blockchain attacks are more hypothetical rather than real-life occurrences. As the industry develops, the number of attacks is getting lower and lower each year. With cryptocurrencies becoming more popular, new untrained investors join every day. This is one of the reasons why crypto scams appear to be on the rise.
- Q1. You just read an article where they mentioned a new token. They said it could be the one to watch in the next year. Its price is still quite low, and you are interested in investing in it. What should your next step be?
- BUY! BUY! BUY! Invest all your spare cash. They recommended it in the article. It’s going to be worth millions once others read about it.
- Read through all paperwork related to the project, including white papers, audits, roadmaps, etc. Get a professional’s opinion on whether it’s worth investing in that token.
- Buy a small amount as an initial investment and wait and see what happens.
- Do your independent research on the project by checking the team and their background, social media pages and community chats, and the token distribution and concentration before investing anything.
- A combination of B and D.
- Q2. There’s a new coin on the market, and it has been getting a lot of attention lately. You’ve seen lots of articles, videos, and tweets about it. You’ve also heard some of your friends and colleagues talking about it. Should you also buy some of it?
- Of course! Everyone else is doing it. If you don’t, you’re going to miss out and regret it later.
- It’s too popular already now. No point in getting involved; it’s too late. No chance of making a big profit at this point.
- Don’t get sucked in by the FOMO. Do your independent research on the coin before deciding about investing.
- Q3. Elon Musk just tweeted about a new meme coin. He said it will be the next Bitcoin. The coin’s Twitter account and website promise a minimum 5x return for all investors. Which path do you choose?
- It sounds too good to be true. It’s most likely a scam, and Musk’s account was hacked to advertise it. Ignore it and move on.
- If Elon Musk says it’s good, then it’s got to be true. Shut up and take my money!
- Maybe the Musk tweet is a fake; even so, a minimum of a 5x return is too good to pass up. Invest a small amount in it; what’s the worst that could happen?
Well, how did you get on? Let’s go through these situations and examine the best course of action.
- Q1 – Here, the best answer is E. Do your independent research, read through all paperwork related to the project, and check the team and their background. Look at all the sites, social media pages, and community chats connected to the project, and review the token’s distribution and concentration. By doing all this, you will gain a better understanding of the project, its future, and whether or not you should trust it with your money.
- Q2 – C is the correct answer. Don’t be a sheep and believe all the hype you hear. Think logically, make your own decisions, and do your research. Listen to the facts, not what other people say!
- Q3 – A. Social media is a breeding ground for such scams. Many celebrities have had their pages hacked by people promoting scam tokens. It’s pretty easy for someone to set up a Twitter account and advertise their new coin as the next Bitcoin. Approach all posts on social media about investments with caution because 99% of the time, they really are just too good to be true.
Follow these few steps to improve your chances of avoiding such scams and protecting yourself and your investments.
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