Smart Contract Scams

Smart Contract Scams: Analysis of "Digital Traps" in the Blockchain World

I. The Essence and Background of Smart Contract Scams

A smart contract is an automatically executed code protocol on the blockchain, which theoretically has the tamper-proof nature of "code is law." However, scams often exploit code vulnerabilities, user cognitive biases, or malicious designs to defraud assets by disguising as legitimate contracts. According to Chainalysis data, losses from smart contract-related scams exceeded $4.6 billion in 2023, tripling from 2021, making it one of the main risks in the cryptocurrency sector.

II. Common Types and Tactics of Smart Contract Scams

1. Fake DeFi Protocol Scams (the most typical)

• Core tactics:

  • Forge high-yield liquidity pools (e.g., annualized yield exceeding 100%) to lure users into staking tokens;

  • The contract code hides a "backdoor," immediately transferring assets or setting an extremely short lock-up period (e.g., the contract self-destructs after 24 hours) after users stake.

• Case:

  • In 2022, the "Forsage" project disguised itself as a decentralized finance platform through Ethereum smart contracts, requiring users to pay ETH to purchase "smart contract nodes," eventually making off with over $300 million. The developer's withdrawal address was hardcoded in its contract code.

2. Phishing Contracts and Counterfeit Tokens

• Core tactics:

  • Clone well-known project contracts (such as Uniswap, PancakeSwap) to create almost identical token addresses and interfaces;

  • Send fake links via social media or emails, and the contract automatically transfers assets in the wallet after user authorization.

• Case:

  • In 2023, a counterfeit "PEPE Coin" contract was promoted on Twitter. After users visited the fake link, the contract obtained token authorization through the approve function and instantly transferred all ERC-20 tokens in the wallet, causing daily losses exceeding $8 million.

3. Liquidity Mining Scams (Rug Pull)

• Core tactics:

  • Issue new tokens and create a liquidity pool on a decentralized exchange (DEX), injecting funds initially to push up prices;

  • The "emergency withdrawal" function is preset in the contract. After users make a large number of purchases, the developer instantly withdraws the liquidity, causing the token price to drop to zero.

• Case:

  • The early version of "SAFEMOON" in 2021 was exposed to have a backdoor in its contract, allowing developers to transfer liquidity pool funds at any time. Although the project modified the code later, initial investors suffered heavy losses.

4. Fake NFT Minting Scams

• Core tactics:

  • Forge smart contracts for popular NFT collections (such as Bored Ape, CryptoPunks), requiring users to pay ETH to "mint" fake NFTs;

  • The contract only generates image links without actual blockchain assets, so users cannot trade on formal platforms.

• Case:

  • In 2022, a "fake Bored Ape minting website" phished through Discord. Users paid 0.5 ETH but only received PNG images. The contract had no NFT standard interfaces (such as ERC-721), resulting in losses exceeding $200 million.

III. Technical Vulnerabilities and Design Traps of Smart Contract Scams

Trap Type	Technical Principle	Typical Case
Infinite Authorization Vulnerability	The contract requires users to authorize "unlimited" transfers (e.g., approve(address, type(uint256).max)), and assets can be arbitrarily transferred after user authorization	In 2023, the DeFi protocol "DeFiSquared" exploited this vulnerability to automatically transfer all USDC after user authorization
Time Lock Backdoor	The contract sets a "time lock" mechanism. On the surface, redemption is possible after the lock-up period, but in reality, the developer's address has priority withdrawal rights in the code	In 2021, the "Cheese Bank" contract allowed developers to transfer $180 million in assets before the lock-up period ended
Fake Oracle Manipulation	Control token prices using fake oracles (such as off-chain API data), luring users to participate in "arbitrage contracts" before harvesting funds	In 2022, "Project X" forged BTC price data, making users mistakenly believe there was an arbitrage opportunity, eventually making off with $50 million
Reentrancy Attack Vulnerability	The contract does not prevent reentrancy attacks, and hackers repeatedly withdraw funds by recursively calling contract functions	In the 2016 "The DAO" incident, hackers used the reentrancy vulnerability to transfer 3.6 million ETH, leading to the Ethereum hard fork

IV. Preventive Measures Against Smart Contract Scams (from technical to operational)

1. Code Audit and Contract Verification

• Mandatory steps:

  • Use blockchain browsers like Etherscan and BscScan to query contract code, focusing on checking:

    • Whether there is an owner privileged address (such as the only operable administrator address);

    • Whether it contains high-risk functions like selfdestruct and infinite transfer;

    • When calling approve, be sure to set a limited amount (such as only authorizing 100 USDC instead of unlimited).

• Tool recommendations:

  • Third-party audit platforms: PeckShield, OpenZeppelin (check if projects have passed professional audits);

  • Test with the "Read Contract" function before interacting with the contract to confirm no abnormal logic.

2. User Operation-Level Anti-Scam Guide

• Three no principles:

  • Do not click links from unofficial channels (such as private messages on Discord, contract addresses in unknown emails);

  • Do not authorize assets to unvalidated contracts (especially "all tokens" permissions);

  • Do not participate in "high-yield, risk-free" staking/mining projects (be highly vigilant if the annualized yield exceeds 20%).

• Practical tips:

  • Enable "advanced mode" in MetaMask to manually set the approve amount;

  • Test new contracts with a small amount of assets (such as first transferring 1 USDC to observe if it arrives normally).

3. Legal and Compliance Bottom Lines

• China's Notice on Further Preventing and Handling Risks of Virtual Currency Trading and Speculation clearly states: Token issuance, staking, trading, and other activities related to smart contracts are all illegal financial activities, and participation involves asset loss and legal risks;

• Overseas users need to pay attention to the definition of "investment contracts" by regulators such as the SEC and avoid participating in non-compliant smart contract projects.

V. Industry Response and Future Trends

• Technical level:

  • Mainstream public chains (such as Ethereum) promote the ERC-4337 account abstraction technology, allowing users to set a "smart contract interaction whitelist" to automatically intercept high-risk contracts;

  • Audit tool upgrades: Platforms like Slither and MythX launch real-time vulnerability scanning, covering more than 90% of common scam patterns.

• User education:

  • In 2023, Coinbase launched a "Smart Contract Security Lab" to help users identify risks through simulated scam scenarios;

  • Decentralized exchanges (DEXs) compulsorily display contract audit status, marking unaudited projects with "high risk" warnings.

VI. Conclusion: Code Is Not the Whole of Trust

The "decentralization" and "tamper-proof" features of smart contracts should theoretically reduce risks, but scams precisely exploit users' blind trust in technology. The core of prevention lies in:

• Technical awareness: Understand that smart contracts are not "absolutely safe," and code vulnerabilities and malicious designs can still be exploited;

• Operational habits: Before authorizing any assets, review on-chain code like reviewing a paper contract;

• Risk awareness: Abandon the fantasy of "getting rich overnight" and stay alert to returns beyond the market's reasonable range.

In the end, in the blockchain world, the only reliable "smart contract" is your own rational judgment.