During the ICO boom of 2017-2018, 95 percent of projects showed signs of scamming. Accordingly, there were no more than 5 percent of the startups that were actually working and interested in further growth. Such a monstrous disproportion undermined user confidence in cryptocurrencies in general and ICOs in particular. It took several years and fundamentally new approaches to initial token offerings, such as IEO and IDO, to bring it back. In the first case, the token sale after the mandatory audit of the project is carried out by a centralized exchange, in the second - by a decentralized exchange. The next stage of evolution is ILAO, but scammers continue to actively work in the niche that is convenient for them, find vulnerabilities in the new schemes of token offerings and still pose a great threat to bona fide businessmen and private investors alike.
History of scam origins
Trading scams have been around as long as the trade itself. Fraudsters have been looking for centuries and finding original ways to profit from other people. With the advent of the Internet, the arsenal of scammers has become even more impressive. The active digitalization of business processes has led to the fact that most financial crimes have become impersonal and largely unpunished. For example, South Korean developer Do Kwon, believed to be involved in the collapse of two major cryptocurrency projects, Terra (Luna) and TerraUSD (UST), is still at large, running social networks and says he is not even trying to hide from justice.
Many researchers believe that the roots of mass ICO scams can be traced back to the turn of the decade during the dot-com boom, when investors pumped money nonstop into high-tech companies and the latter didn't know what to do with the billions that were pouring into their heads. Because of this, funds were often spent in irrational manner and were used, for example, for large-scale marketing activities. The bubble predictably burst, crashing global markets.
During the ICO boom, the picture was much the same, with the only difference being that the amount of investment raised in ICOs was, on average, much smaller than that of Internet companies.
Cryptoarchaeologists have no consensus on which ICO project went bust first. There are too many variants. However, the name of the ICO organizer, who was officially charged with fraud for the first time in history, is known for certain. He was entrepreneur Maxim Zaslavsky, who promised to exchange REcoin tokens for real estate and precious stones. According to the U.S. Securities and Exchange Commission (SEC), the total damage from Zaslavsky's activities could range from $2 million to $4 million. However, the largest cryptocurrency scam projects in history have stolen far more substantial sums from investors.
The largest scam projects in cryptocurrency history
OneCoin tops the sad ranking of "bailed out" projects. It started in 2015 and is remembered for the fact that it started to issue its own token without a blockchain. Two years later, the project shut down. Deceived investors lost about 4 billion euros.
In second place is the Africrypt project. Its founders claimed that all the money invested would be used to buy bitcoins. The profit was supposed to be received at the expense of the exchange rate difference. It was counted on a powerful bull rally, which never took place. In April 2021, the project team announced about the powerful hacking attack, due to which the investors lost more than 3.5 billion dollars.
The third place in the ranking of the largest scam projects in history rightfully belongs to Thodex. This Turkish project ceased to exist in April 2021. One day investors simply could not withdraw money from their wallets. The cumulative damage from the actions of the Thodex team exceeded $2 billion.
Another scam project worth mentioning was the work of a group of programmers from Vietnam. The scammers simultaneously launched two ICOs. The first was for the project iFan, which was positioned as a social network for celebrities, providing a wide advertising functionality. The second was for Pincoin, which was essentially a classic pyramid scheme. The story of the two startups ended equally abruptly: the team supporting them moved out of the office in Ho Chi Minh City overnight and stopped communicating. Because of this, more than 30,000 investors lost about $660 million.
Types of fraud schemes
There are a huge number of fraud schemes in the world, so we propose to consider in detail only the most common of them.
Scammers create a good copy of a well-known and promoted project. The only difference is its contact information. After some time, they begin to actively process the audience of the donor project, announcing lucrative promotions and offers. A special wallet is specified to collect money, which belongs to the attackers. After a few weeks of active work, the chameleon disappears without a trace.
The initial placement of tokens provided fraudsters with unlimited room for maneuvering. Taking advantage of the public's interest in the new technology, they came up with fantastic fabrications, putting them in the form of startups to attract funding.
As we have already said, during the ICO boom the share of workable projects did not exceed 5 percent of the total number of placements. All the rest were either outright frauds, or empty shells, or unrealizable fantasies like extraction of gold from running water or construction of a huge aquarium with sea water for breeding plankton.
Speaking of scams in the world of cryptocurrencies, it is impossible to ignore such a concept as a "Ponzi scheme," which is understood to be a classic pyramid scheme. This type of fraud is as old as the world: pyramid founders attract the first investors, promising them high profits on the condition that they will bring more investors. The scheme works up to a certain point, but then the scammers withdraw all the money from the project and the pyramid collapses. One of the largest cryptocurrency pyramid schemes was Bitconnect. It even stayed on top of Coinmarketcap for quite a long time.
Another popular and very common type of scam, which involves stealing wallet keys and then emptying them. This can happen in two ways:
With the help of links to fake sites of exchanges or wallets, by clicking on them and entering personal data, the victims allow the criminals access to their finances.
Through direct solicitation. Attackers often contact users, introduce themselves as employees of large cryptocurrency companies, and offer to help them verify their accounts. Gullible clients hand over their private keys to fake tech support employees and quickly lose everything they have stored on their wallets.
Exit-skimming is a type of fraud, when cryptocurrency project imitates boisterous activity for some time or really conducts it, but then suddenly dissolves in air with all invested to it funds. Sometimes even cryptocurrency exchanges can do that, and they usually justify termination of their operations with hacker attacks.
Pump & Dump
The literal translation of the term "Pump & Dump" sounds like "pump and dump", which exactly reflects the essence of such fraud. The idea is that before or during the first days of an event (e.g., at the very beginning of token listing), the team uses their own resources to push the coin's exchange rate to the highest possible level, and then within several minutes, they get rid of the asset, dropping its exchange rate to zero. One of the most notorious examples of this type of scam was the Squid Game project, which emerged on the wave of popularity of the Korean series "The Squid Game.
Scammers also actively work with decentralized finance (DeFi). Among the most common scam schemes here are the following:
Rug pull. Attackers create an asset (often disguised as a popular token), launch a trading pair and pool for it on a decentralized exchange. Users invest their money in the token, believing it to be promising and attractive. It all ends when the organizers of the scheme decide to withdraw from the market and take all the liquidity. The value of the asset then drops to zero and it turns into garbage.
Exploit is a type of malware that is used by hackers to identify and exploit software vulnerabilities on both local and remote computers. From an exploit point of view, a smart contract is just one kind of software that can be hacked via the same DoS attack. Sometimes developers deliberately embed vulnerabilities in their decentralized protocol to be able to later disguise the theft of user funds as a hack attack.
Honeypot, or decoy. In this type of fraud, attackers create a token, release it on a decentralized exchange, and begin aggressively marketing it. At the same time, the smart contract will contain a ban on the sale of the coin by anyone other than the scheme's organizers. As long as the asset is bought, the project shows signs of life. As soon as users start wondering why they can't sell the tokens they bought, the scammers dump everything they have, leaving investors with nothing.
There are a huge number of fraud schemes in the world of cryptocurrencies. It is simply impossible to have a detailed understanding of each of them. Therefore, for those who do not want to become a victim of another scam project, experts recommend not so much to study the history of the issue, as to follow the basic rules of cryptocurrency hygiene.
You should not chase amazingly attractive offers. The success of any serious project is an investment, painstaking work and time. If a startup promises astronomical profits in the first month - most likely, it is a scam.
Do not trust people who offer to discuss investment issues in private messages. Serious developers do not physically have time to offer participation in token-sales in messengers or social networks. If a personal offer comes by email, you should definitely check the sender's address.
Do not trust the links you receive and never click on any of them that raise even the slightest doubt.
When planning to buy tokens, be sure to check the trading history on large trading floors, as well as thoroughly study the technical documentation of the projects you are going to invest in. If you cannot go into all the details on your own, call in experts to help.
Pay attention to where and how passwords from your cryptocurrencies are stored. The security of your savings directly depends on it.
The main question that crypto-enthusiasts ask every day is, "If the topic of scams is so well researched, why are scammers still so active?" The answer is simple: attackers are constantly coming up with new options for cheating, which even experienced professionals sometimes can't recognize at first glance.
Therefore, in order not to get into trouble, investors working with cryptocurrencies, firstly, do not for a moment forget the saying about free cheese, and secondly, it is necessary to collect maximum information on each of the investment-attractive projects.
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