How To Spot A Crypto Scam • Ponzi Coins • Benzinga Crypto

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Some of the most promising technological, economic and political advancements are currently being developed by the blockchain and cryptocurrency industry, but the technology is still not well understood by regulators and the general public. As a result, crooks around the world are taking advantage of new technology to prey on uneducated consumers.

Here’s a quick guide to spotting these types of crypto scams, along with a brief overview of the industry and its technology.

How to spot a Ponzi coin

Ponzi coins like SafeMoon, Baby Doge Coin, and FEG token require users to pay a redistribution or reflection fee for selling and sometimes transferring coins. These coins typically live on the Binance Smart Chain, although many are based on Ethereum. Usually a portion of the fee is burnt or withdrawn from circulation. By doing this, the projects pretend to be revolutionary deflationary currencies when in reality they are not doing anything new at all.

The rest of the fees that are not burned are redistributed to the token holders, in proportion to their share of the total supply. Project leaders will then describe this return as a source of passive income when the majority of the money actually goes to the creators who hold the biggest share of the pie. As these rich few sit down and sell their winnings, the token loses value as the passionate community refuses to sell (and pay the huge tax) and goes broke. Another thing to watch out for is a portion of the redistribution donated to charity. These projects often do this to disguise their intention.

Other Quick Tips Check out CoinMarketCap.com to see the ranking of coins or projects. Anything outside the top 1000 is usually not worth worrying about.

2. Find the white paper. A white paper will tell you all about the coin and can usually be found on CoinMarketCap.com. Go to the section called Tokenomics and look for any sort of redistribution fees.

What is blockchain?

A blockchain is a database or a public computer based on the Internet. All over the world, people known as miners are contributing their computing resources to the blockchain network for profit. Users pay to access this global computer because of the benefits offered by its decentralized nature.

However, not all blockchains are created the same, as many of them are only controlled by a few powerful players. Nodes are complete copies of the entire blockchain. Each node must contain an identical copy of the blockchain, and these nodes must always communicate and reach consensus on recent events. These recent events can be transactions or smart contracts, but regardless, they are grouped into time intervals (blocks) and chained together.

The blocking time for Bitcoins is around 10 minutes, while Ethereums is closer to 15 seconds. At the end of each block, the current state of the database (portfolio balances updated after a batch of transactions) is finalized by consensus. If a few nodes try to slip in a few more BTCs, their proposed version of the block will be rejected by the group as a whole. This solution is possible because the individual actors across the network only benefit from honesty. Dishonesty can only be achieved by corrupting 51% of the total network power (51% attack). For large blockchains, a 51% attack is not economical; however, small blockchains like Ethereum Classic are often attacked with success.

After confidence in mainstream finance collapsed after the 2008 financial crisis, an anonymous person using the name Satoshi Nakamoto realized the need for a trustless store of value. The magic of blockchain is that when a network of individual actors as a whole is properly incentivized, the need for trust is theoretically suppressed. Satoshi realized that a blockchain-based trustless ledger (like the ledgers that all centralized banks use to track account balances) would solve the problem. It’s Bitcoin.

A few years later, Russian programmer Vitalik Buterin took the powers of decentralization to the next level. Instead of a payment ledger, what if a blockchain was a general-purpose virtual machine that worked as a place for developers to build all kinds of apps that could benefit from running decentralization? It’s Ethereum. The developers quickly understood the implications of this ecosystem and began to rebuild the entire financial ecosystem on the blockchain. The result is called Decentralized Finance, or DeFi, and although it is only 5 years old, it is already empowering the 40% of the world’s unbanked population and threatens to end traditional finance as we know it. .

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What to look for in a solid crypto project

The best cryptocurrency projects aren’t those that claim to be groundbreaking but those with billions of dollars in transaction volume already flowing through their app or blockchain.

It is important to understand whether a project is its own blockchain or an application built on another blockchain. Some examples of independent blockchains are Bitcoin, Ethereum, Solana, Cardano, Cosmos, and Polkadot. Each blockchain has its own DeFi ecosystem, provided they can handle smart contract execution (Bitcoin doesn’t and Cardano will soon).

The most popular apps (by transaction volume) on the Ethereum blockchain are OpenSea (non-fungible token or NFT platform), Uniswap (exchange), and Axie Infinity (NFT game). Let’s take a look at Decentralized Exchanges (DEX) to get a feel for a solid foundational blockchain application.

Decentralized exchanges

A DEX like Uniswap allows users to swap between currencies based on the Ethereum blockchain (other DEXs exist on other chains and allow users to trade the assets of those chains because blockchains are not yet interoperable) . Liquidity for any given swap is also provided by users, called liquidity providers (LPs), who collect the swap fee to provide liquidity. Because the process is anonymous and decentralized, it allows users to earn stablecoins like USDC without using a centralized exchange. Selling this magically appearing USDC for fiat with Coinbase, however, will require some explanation from the IRS.

The future of cryptos is hard to predict

Cryptocurrency and blockchain have already changed the world in significant ways. The thing about blockchain is that once it’s out of the bag, it’s really hard to stop. To shut down a blockchain like Bitcoin or Ethereum, all the governments of the world would have to come together, agree and quickly execute a highly technical mission.

Okay, here’s some questionable speculation. In all likelihood, governments are on the verge of losing their monopoly on money. Bitcoin is likely to become the world’s reserve currency, and governments around the world will begin to manage their own nodes to remain relevant in the blockchain-based global economy of the future. Ethereum will become the global settlement layer, and other blockchains like Cardano and Polkadot will have a lot of demand for their chains as well. The lofty goals of Web3 will be achieved with Ethereum, and individuals around the world will enjoy unprecedented levels of financial freedom. Either that or his mania for tulips.

Benzinga has developed a specific methodology for classifying cryptocurrency exchanges and tools. We prioritized platforms based on offers, prices and promotions, customer service, mobile app, user experience and benefits, and security. To see a full breakdown of our methodology, please visit our Cryptocurrency Methodology page.

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