Liquidity Mining Scams: Types, Tactics, and How to Avoid Them

Liquidity mining scams are on the rise, and it's essential to know how to spot them. Scammers often create fake liquidity mining pools to lure in unsuspecting investors.

These scammers use tactics like fake yields and manipulated token prices to convince investors to join their pools. They promise unusually high returns, which is a red flag.

Investors should be cautious of scammers who demand private keys or access to wallets in exchange for liquidity mining rewards. This is a clear sign that something is amiss.

Investors should do their research and thoroughly vet any liquidity mining opportunity before investing.

Fake Liquidity Pools are a common tactic used by scammers, where they mimic the interface and branding of legitimate DeFi projects to trick users into depositing funds.

Ponzi Schemes are another type of scam, where new investors' deposits are used to pay off earlier participants, collapsing once new funds dry up.

Rug Pulls occur when developers of fraudulent projects withdraw all liquidity from the pool, effectively stealing users' funds.

Unverified Smart Contracts are used by scam platforms to exploit user funds, often through poorly written or malicious contracts.

Here are the common types of scams you should be aware of:

The "Dictionary" DeFi Scammer is a serial fraudster who has deployed over 9,000 scam tokens across three different blockchains – Ethereum, BNB Chain, and Polygon.

This scammer's modus operandi is to use dictionary words for variable names in their tokens' constructor and transfer functions, making it easy to spot their fake tokens.

The scammer's entire rug pull process is visible on the blockchain, and it typically involves deploying a scam token, pairing it with a popular cryptocurrency in a liquidity pool, and then minting an absurdly large number of new tokens to drain the liquidity pool.

Here are the typical steps in the dictionary scammer's rug pull process:

Thodex was a Turkish cryptocurrency exchange with about 400,000 users. It was accused of pulling an exit scam earlier this year.

The exchange's website stated that the platform is "temporarily closed" to address an "abnormal fluctuation in the company accounts."

Thodex's CEO allegedly took $2 billion of customer funds with him while fleeing Turkey.

Compounder Finance was rug-pulled earlier this year, with $10.8 million of investor funds stolen.

The team swapped the safe and audited contracts with malicious ones, which allowed them to drain $750,000 worth of wrapped bitcoin, $4.8 million ether, $5 million dai, and other tokens.

This incident highlights the importance of thorough contract audits and regular security checks.

Cylynx helps law enforcement agencies cut down tedious investigation work by automating the tracing process on the blockchain. This is made possible through a combination of their graph propagation algorithm and on-chain forensics.

Their reports provide a clear audit trail of the source of funds, which can be traced back to the blockchain, giving law enforcement agencies the confidence to use them as part of their investigative work.

Cylynx's Transaction Monitoring solution allows exchanges and other VASPs to prioritize risk cases and improve screening efficiency in real-time.

Cylynx helps investigations by automating the tracing process of blockchain activities through a combination of its graph propagation algorithm and on-chain forensics.

This allows for the delivery of tracing reports much more efficiently, providing a clear audit trail of the source of funds that can be traced back to the blockchain.

Law enforcement agencies can use these reports with confidence as part of their investigative work.

Cylynx's Transaction Monitoring solution also helps exchanges and virtual asset service providers prioritize risk cases and improve screening efficiency in real-time.

This includes screening sources of funds by filtering and rapidly identifying transactions from sources of concern.

Cylynx provides a risk-based approach to cryptocurrency monitoring to help VASPs comply with regulatory requirements.

Its solution detects red flags associated with suspicious transactions using on-chain analytics and adverse news coverage.

Tracing activities on Etherscan is a crucial step in investigating DeFi scams. Etherscan is a blockchain explorer that allows users to track transactions and smart contracts on the Ethereum network.

To start tracing activities on Etherscan, you can use the platform's built-in tools to identify suspicious transactions and smart contracts. For example, in the case of the TRUAMPL (TMPL) token, investigators used Etherscan to track the token's transfers log, which revealed only 20 transactions and 10 holders within a span of 4 days.

The Uniswap-TMPL smart contract on Etherscan revealed a similar scam operation on a larger scale. By examining the sequence of events, investigators found that the scam token creator added liquidity to the DeFi platform, users swapped ETH for TMPL, the price rose due to FOMO, and the scammer removed liquidity and took gains.

Here's a breakdown of the sequence of events:

By using Etherscan to track the transactions and smart contracts involved, investigators can uncover the trail of illicit funds and identify the scammers behind the operation.

Scammers often use fake liquidity pools to trick users into depositing funds. These platforms mimic the interface and branding of legitimate DeFi projects, making it difficult to distinguish between the two.

Some scams operate by using new investors' deposits to pay off earlier participants, a tactic known as a Ponzi scheme. This can collapse once new funds dry up, leaving investors with significant losses.

Rug pulls are another tactic used by scammers, where developers withdraw all liquidity from the pool, effectively stealing users' funds. This can happen suddenly and without warning, leaving investors with nothing.

To protect yourself from these scams, it's essential to research the project and its team. Look for reviews and community discussions on platforms like Reddit and Twitter to get a sense of the project's legitimacy.

Here are some common red flags to watch out for:

Only invest in platforms with independently audited smart contracts, as this helps ensure the security and transparency of the platform's code. Be skeptical of unrealistic returns, as scammers often entice users with promises of extremely high rewards.