8 Methods to Verify if a Token is a Scam
The blockchain industry is filled with promises of quick and easy money. It is crucial for traders to identify which projects are safe and which are destined to fail after 3 months. This article presents eight methods to check and avoid effective scams.
1. Start with the Basics
To verify the legitimacy of a token, start with the easiest accessible methods. For example, conduct a Google search and check Twitter for any dangerous or warning signals regarding the token and its team. Look for reliable sources of information such as official websites, news articles, and verified social media accounts.
Check for Dangerous Signals on Social Media
Verified accounts, such as X (Twitter), can help prove the legitimacy of a project. Additionally, participate in discussions about the token to understand the community’s perspectives and opinions.
Be cautious of projects with a large number of followers on social media but low engagement. Automated comments from fake accounts should also be considered a dangerous signal. If all the comments are along the lines of “This is a great project” and “Moon is coming”, caution is advised.
Check Token Address on Google Search
If a clear homepage, whitepaper, or obvious token purpose cannot be found online, it is likely a scam. When searching for the token address, it should be easy to find links to block explorers, official websites, and whitepapers. If not, consider it a dangerous signal.
Furthermore, be aware that Google ads are often a free zone for scam websites. Do not click on the top ads in Google search results. Make sure to visit the official website and avoid clicking on Wallet Drainers or other hacking software.
2. Verify Code on Etherscan
Visit the blockchain browser of the chosen chain and check if the code has been verified. For example, on the Ethereum blockchain browser Etherscan, it should look like the image below. If the code has not been verified, you may have encountered a scam.
Why don’t scammers directly verify their code?
Because once the contract’s source code is public, anyone can know the intentions behind the contract. It could be a ridiculous token scheme or a way for developers to steal all your tokens. However, does this mean that every unverified contract is a scam? Not necessarily, but it is a very serious dangerous signal.
3. Check the Comments Section on Etherscan
This section is straightforward, as most blockchain browsers have a comments section. Most of the time, there are no comments, but if a project is a scam, you may find a group of angry individuals in the comments section. So be sure to click and view. If someone says it’s a scam, there’s a 99% chance it is. If you are a victim of the project, please leave a comment as well.
4. Check the DappRadar Blacklist
You can compare the token address with the token blacklist compiled by DappRadar on GitHub. If the token address appears on the list, it is a scam.
5. Check Token Details in Token Indexes
If you cannot find the token on the token index of CoinGecko or DappRadar (or similar token price trackers), then it is likely a scam. If you see a warning like the image below, proceed with caution:
All legitimate tokens share their information with token index websites for verification. However, platforms like CoinMarketCap and CoinGecko have specific criteria to be met.
Therefore, not all tokens (regardless of their legitimacy) will automatically be listed on these token index platforms.
6. Check How Many Exchanges List the Token
If a token is only traded on a few decentralized exchanges (DEX), it may be a scam. Listing on centralized exchanges requires KYC and additional trust, and the larger the exchange, the better the reputation of the listed tokens.
However, tokens listed only on DEX are not always scams. Some projects do not require high trading volume, and some projects cater specifically to Web3 users rather than token traders.
Nevertheless, tokens listed solely on DEX are a higher-risk investment, and you are more likely to encounter scams. The image below shows a token that is only used on DEX on the left, and a token that can be used on multiple CEX on the right.
7. Check the Liquidity in the Token Balance Pool
Before investing in a token, it may be necessary to check the availability of overall demand and liquidity. Checking the liquidity of a token on platforms like Uniswap V2 or other DEX is straightforward.
Liquidity refers to the amount of cryptocurrency or tokens locked in a smart contract, allowing users to buy and sell assets through (decentralized) exchanges. If the liquidity is below $100,000 or rapidly decreasing, you may have encountered a scam.
When using DEX, be sure to check the basic activities on other chains, including:
– Trading volume
– Number of transactions
– Number of independent active wallets interacting with the smart contract – the number of users connecting to the DEX through Web3 wallets.
If any of these appear unusual, conduct further investigation.
8. Use Third-party Analytical Tools
Here are some token analysis tools:
– Smell Test: Conducts an automatic audit of the token. The lower the score out of 100, the more likely it is a scam.
– Honeypot: A smart contract intentionally inserted with obvious programming flaws. When attackers exploit the flaw, hidden code is activated to counter-attack the attacker. Honeypots should be avoided, whether or not you intend to be a crypto hacker.
– DEXtools: Records real-time token prices and provides explanations for evaluating the real value of the token.
Whether in the blockchain or the real world, scammers always exist. By following these suggestions, you should be able to avoid fake tokens aimed at scamming funds.