So crypto recorded a whooping sum of $45million loss of investor’s funds to rugpulls only in the month of May, wow. Well, sometimes it can be really hard to tell the difference between a smart contract in a trustworthy project and one in a bad project because bad actors use different tricks at different times. Understanding the situation is important.
However, you can follow some basic safety rules to help you check smart contracts, understand what a project is trying to do, and see if there are any risks.
Basic Safety Guidelines
You need to look at two main things:
1. The smart contract itself. In this area, you should examine different things which include contract ownership and looking for strange functions in smart contracts.
- Ownership if the contract is owned by an Externally owned account, you need to be sure of the functions this EOA can call, as it can be able to call functions that can jeopardize the security of the investor's or user's funds. It's a good idea to stay away from projects where the person who owns the smart contract can control important functions.
Instead, it's better to pick smart contracts that are decentralized or contract ownership renounced as the owner's address is "burned"(0x000000000000000000000000000) after everything is set up, which means they can't control it anymore.
- minting function which if enabled, depending on the context it is used in a token contract can lead to token inflation.
- Pause function This function lets the contract owner halt the contract, even if you have your money locked in it. Your money will be stuck until they decide to unpause the contract. This could be detrimental because, for instance, if there's a problem with the smart contract and you want to move your money to a safer place, you can't do it while the smart contract is paused. It's also a problem if the price of the tokens you put in goes down and you want to take them out to sell. The pause feature means you can't get to your money.
- migrate function This feature can be really dangerous for people who earn rewards from their investments because bad actors might use it to move money from the investment contract to their own account or to a different centralized contract. This could possibly lead to everyone using that contract losing their money.
- code verification Make sure to see if the smart contract code you're looking at has been verified by the network explorer (Etherscan, Bscscan etc). This helps you know if the code in the contract matches what's on the blockchain.
- Tokenomics in a situation where an externally owned wallet is holding a large % of the token distribution. Then there is a risk of them dumping the token on investors hence crashing the price. For example, an externally owned wallet holds 20% of the token supply.
2. The project behind it. thinking about how many tokens are being made, and even checking what the project's social media says about the people involved and their intentions.
- social media presence Good projects that care about their users talk to them a lot and share updates about what they're doing. They use social media(Twitter, medium, telegram), blogs, websites and other ways to talk to their community. Be cautious about projects that don't give you enough information and don't listen to your questions or requests. Also, be careful if a project is offering weird deals or promotions.
- whitepaper/documentation It's crucial to verify if a project offers a whitepaper or some other technical document that explains its goals, how it works and its architectural system. If these documents only provide vague descriptions and don't clarify the project's worth or technical details, it might suggest that they were created merely as a required formality.
- team development history It's typically better if the project is open to the public, allowing every team member to be confirmed or checked. You should make sure that each team member possesses strong experience and skills. Teams lacking experience might develop products with security weaknesses. It is also important to know how many devs are committing to the project repo and at what speed.
In Summary, It's crucial to adhere to these steps when navigating the world of crypto to safeguard yourself against potential scams. Evaluating a project's overall structure is an essential measure to ensure the legitimacy of the venture. By scrutinizing these above aspects, you can gain insights into the project's intentions, safety and overall credibility. The crypto space is rife with scams. Therefore, taking these precautions is paramount to protect your investments and avoid falling victim to fraudulent schemes in the crypto world.