Financial fraud in liquidity extraction – A symptom of the crypto hype

With the article “Liquidity Mining Scams Add Another Layer to Cryptocurrency Crime” published today, Sophos launches a series of how scammers exploit the hype surrounding cryptocurrency trading to lure and deceive potential investors.

In the article, Sophos explains how the complexity of cryptocurrencies and decentralized finance (DeFi) – the fundamentals of liquidity mining – create the ideal environment for criminals to hide and carry out their sinister intentions. Potential victims are smartly targeted. Recipients proactively receive direct spam messages on Twitter, What’s App, Telegram and other social networking platforms, and initially chat harmlessly about liquidity extraction. Step by step, the criminals then escalate their perfidious scams.

Image: Screenshot of an early-stage conversation used to entice a target. As spam as this direct message may seem, people fall for the following: CryptoCrime Liquidity Mining.

A single direct message led to several scam groups

By investigating interactions within a single direct message on Twitter, Sophos revealed several floating mining scam groups. “Liquidity mining is a form of cryptocurrency investment in DeFi that, even when ‘legitimate’, is both questionable and complicated,” said 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, which many people cannot easily interpret, even if it is published. New investors are also missing reliable information on 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 has not yet reached its peak. Hundreds of millions of dollars are at stake. “

How Liquidity Mining works

Legitimate liquidity mining allows DeFi networks to automatically settle trades in digital currencies such as Ethereum, the preferred cryptocurrency for liquidity mining. Smart contracts integrated in 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 that these decentralized exchanges (DEX) can deduct to close trades, they rely on crowdsourcing to provide the pool of cryptocurrency capital needed to close a trade – one liquidity pool.

To create the liquidity pool that handles transactions between cryptocurrencies, such as Ethereum and Tether, investors put the same value of both cryptocurrencies into the pool. In return for committing this cryptocurrency to the pool, investors receive compensation based on a percentage of the trading fees associated with the DeFi Protocol.

Investors will also receive liquidity pool tokens (LP tokens) representing their share of the pool. These tokens can be “hedged” or linked to the stock exchange, further tying up the initial contribution and giving the investor dividends in the form of another cryptocurrency associated with the DeFi project. The value of these reward tokens can vary widely.

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The scam is old

“The mechanics of liquidity mining, in their legitimate form, provide the perfect camouflage for what are essentially old-fashioned scams recreated to the cryptocurrency age,” says Sean Gallagher. “Like traditional Ponzi schemes, criminal liquidity mining schemes give the illusion that they can withdraw their funds at any time and even allow them to make early withdrawals. However, fraudulent gangs are constantly pushing the targets to keep investing and ‘investing big’ by hide the real operations of fake applications, fake earnings reports and promises of lucrative payouts. , that everything is in order before they finally interrupt the communication. “

Sophos does not expect that despite the recent cryptocurrency crash (as of May 13) and current volatility, overall liquidity recovery will be hampered as Tether returns to near par and other cryptocurrencies recover. “The criminal economy is still driven by cryptocurrency, and there is enough interest in cryptocurrency to keep liquidity mining and similar scams afloat,” Sean Gallagher said.

See Liquidity Mining Scams Add another layer to Cryptocurrency Crime for more information.

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