Cryptocurrency is a disruptive technology with great potential to revolutionize global financial markets, but like any emerging industry it is still highly experimental and lucrative.
Traders can rest assured that the vast majority of the more than 21,000 tokens currently available for trading on the market are scams or – when not intentionally malicious – technically deficient.
In the worst case, users can fall victim to scams or get hacked by entrusting their money to inconsistent projects. After all, anyone with intermediate programming knowledge is able to create a token and create a trading pair on a decentralized exchange (DEX) to try to make easy money at the expense of inexperienced investors.
No wonder one of the most popular phrases among the cryptocurrency community is: “do your own research”. Below, Cointelegraph Brasil offers seven simple steps that any investor can take to analyze the fundamental risks of a particular token before risking their money by investing in it driven by massive spikes or social media campaigns.
First of all, know that you will need to deal with block explorers. Here, we will take Etherscan as the default, since the Ethereum (ETH) network is the most popular on the market. But all other networks have their own explorers with similar features.
1. The token is scanned on Etherscan
The first step here is to find out the address of the code you want to check. You can find them by visiting sites like CoinMarketCap and clicking “Contracts” in the specific token attribute on the left side of the page, just below its ID. It is also possible to find it directly through the Etherscan search tool by typing in the name of the token to be investigated.
Below, we take the Uniswap (UNI) decentralized exchange token contract as an example. Scrolling down the page a bit, the user will find the option to check the contract details. The code verification confirmation in Etherscan is found in the first lines of the code.
UNI code details confirm your verification. Source: Etherscan
If the code is not verified, it is likely to be a scam or a project developed without proper technical sponsorship. The prudent investor should get rid of them immediately
2. Check out the Etherscan comments section
The last tab on the right, in the same section where you can check the code, there is space for comments. If there are claims or even accusations that the token is a scam, you better be wary. There is a high chance that this will not be a reliable investment.
It’s even a tool that victims can and should turn to in the event of fraud, ruggedness, or hacking. It won’t help them recover lost money, but it will serve as a warning to other investors.
3. Use Google and social networks to search for information
If a website is not found on the Internet after a basic Google search, the token may be discarded. However, it is highly unlikely that scammers will fail to take this basic precaution.
Therefore, after entering a certain project site, find a file White papers, which should contain basic information about the token, such as its use cases, economic model, among other things. If an investor does not have technical knowledge about the cryptocurrency market, simply having a file White papers You can make a good impression.
So, the next step is to search for information about the developer team. Most likely, you will not know them. But searching on Twitter and then on LinkedIn can provide tangible clues about the team’s fit.
Developers sometimes prefer to remain anonymous and use pseudonyms for reasons of privacy and now, under pressure from regulators, security. Anonymity in itself is not necessarily a bad thing, as long as it is possible to find information about the background of the participants.
4. Check the exchanges the token is traded on
Anyone can list a token on a decentralized exchange as long as they are able to provide liquidity for a single trading pair. Therefore, tokens that are only traded in DEX should be analyzed more carefully.
The listing process on centralized exchanges is usually more rigorous. Especially in the most popular ones on the market. Tokens traded on global exchanges such as Binance, Coinbase, FTX and Kraken, and in Brazil, on MB, BitcoinTrade or Foxbit, are unlikely to cause headaches for investors, except for the inherent volatility of the market.
5. Check out the token liquidity pools that are only listed on DEXs
They often become market gems that will become hype In a bull market futures that is initially listed on DEX only. Thus, once all the previous steps have been verified, potential investors can check which liquidity pools support the trading of a particular asset.
It is not difficult to check the liquidity of the token in DEXs such as Uniswap or even the lesser known ones. Liquidity is the amount of cryptocurrency or the number of tokens locked into a specific smart contract to allow people to buy and sell assets on decentralized exchanges.
If the liquidity is small, less than $100,000 for example, or is decreasing at a significant rate, it is likely a scam.
When trading cryptocurrencies on DEX, the user should pay attention to other basic information about a particular token. For example, trading volume, which is the amount of tokens being exchanged, the total value of which is usually expressed in dollars; transaction count – the number of transactions involving the token; And finally, the number of unique active wallets that interact with a given smart contract – this number indicates the number of users connected to a particular DEX with a non-custodial wallet. If any of these seem unusual for any reason, it’s good to be on your toes.
6. Check out our other analysis tools
Most investors are not familiar with it, as they tend to only use the most popular platforms in the market, such as CoinMarketCap and CoinGecko, but there are some interesting analysis tools for those who analyze the unknown ones. Here is a list of some of them:
Smell Test provides functionality that performs automated token validation. The lower your score from the maximum of 100, the higher the risk associated with the token.
Attractions, or honey pots, in the free translation, are smart contracts with a software flaw that were introduced intentionally in bad faith. When attackers try to exploit the flaw, hidden codes are activated to attack the attackers. Ethereum Honeypot Detector protects investors from scams of this kind.
DEXtools is a multifunctional tool, specifically around DEXs and their liquidity pools. Some of them can be exploited by investors to gauge the true value of a token in real time.
Read more