Financial fraud with liquidity mining - Current scam in crypto hype picks up speed
"The mechanics of liquidity mining in its legitimate form provide the perfect cover for what are actually old-fashioned scams reimagined for the cryptocurrency age, " Sean Gallagher, senior threat researcher, Sophos.
With today's article „Liquidity Mining Scams Add Another Layer to Cryptocurrency Crime”, Sophos kicks off a series highlighting how scammers are exploiting the hype around cryptocurrency trading to lure and defraud potential investors. This time, the experts explain how the complexity of cryptocurrencies and decentralised finance (DeFi) - the basics of liquidity mining - creates the ideal environment for criminals to disguise and execute their dishonest intentions. Potential victims are cleverly targeted in the process. Recipients proactively receive spam messages via direct message on Twitter, What's App, Telegram and other social networking platforms, initially chatting harmlessly about liquidity mining. Step by step, the criminals then escalate their perfidious hoax.
Above: Screenshot of a conversation in the initial phase with which a target person is lured. As spammy as this direct message may seem, people fall for what follows: CryptoCrime Liquidity Mining.
A single direct message led to multiple fraud groups
Using an examination of interactions within a single direct message on Twitter, Sophos was able to uncover multiple liquidity mining fraud groups. "Liquidity mining is a form of cryptocurrency investment in DeFi that, even when 'legitimate', is both dubious and complicated," explained Sean Gallagher, senior threat researcher at Sophos. "The strategies behind the investments themselves are complex and there is no regulation beyond the 'smart contract' code embedded in the DeFi network's blockchain - code that many people cannot easily interpret, even if it is published. Moreover, new investors lack reliable information about how these networks work. Despite these risks, liquidity mining is the latest cryptocurrency investment craze, but these factors also make it the perfect platform for scammers. Unfortunately, we expect Liquidity Mining CryptoCrime to continue; it hasn't reached its peak yet. Hundreds of millions of dollars are at stake."
How Liquidity Mining Works
Legitimate Liquidity Mining enables DeFi networks to automatically transact in digital currencies such as Ethereum, the preferred cryptocurrency for Liquidity Mining. Smart contracts integrated into the DeFi network must quickly determine the relative value of the exchanged currencies and execute the trade. Since there is no central pool of cryptocurrencies for these decentralised exchanges (DEX) to draw from to complete trades, they rely on crowdsourcing to provide the pool of cryptocurrency capital needed to complete a trade - a liquidity pool.
To create the liquidity pool that handles transactions between cryptocurrencies, such as Ethereum and Tether, investors:inside give equal value of both cryptocurrencies to the pool. In exchange for giving this cryptocurrency to the pool, investors receive compensation based on a percentage of the trading fees associated with the DeFi protocol. Investors also receive liquidity pool tokens (LP tokens) that represent their share of the pool. These tokens can be "hedged" or linked to the exchange, which further locks in the original contribution and allows the investor to receive dividends in the form of another cryptocurrency associated with the DeFi project. The value of these reward tokens can vary widely.
The scam is old
"The mechanics of liquidity mining in its legitimate form provide the perfect cover for what are actually old-fashioned scams reimagined for the cryptocurrency age," says Sean Gallagher. "Criminal liquidity mining schemes, like traditional Ponzi schemes,[1] give targets the illusion that they can withdraw their money at any time, and even allow them to make early withdrawals. However, the scam gangs constantly urge the targets to keep investing and 'invest a lot' by disguising what is actually happening with fake applications, fake earnings reports and the promise of lucrative payouts. In reality, the scammers have gained control of their targets' cryptocurrency wallets and withdraw the currency whenever they want. Gradually, the fraudsters empty the wallets while continuing to reassure the targets that everything is fine, before eventually cutting off communication."
Sophos does not expect that despite the recent crash in cryptocurrencies (up to 13 May) and the current fluctuations, liquidity mining as a whole will be hindered as Tether returns to near parity and other cryptocurrencies recover. "The criminal economy is still driven by cryptocurrency, and there is enough interest in cryptocurrencies to keep liquidity mining and similar scams afloat," said Sean Gallagher.
The Ponzi-System, also known as the Ponzischeme ( englisch Ponzi scheme) orPonzi game, is named after the American fraudster Charles Ponzi. The Ponzi scheme is a supposedly sound business model that is actually a fraudulent scheme. Investors are promised a high return and confirmed every year that the money will multiply as promised.