Ethereum has proven to steadily be out of step with being secure for users, with a large number of scams blighting the blockchain, according to recent research. According to the report, which was conducted by the specialist research analytics firm, Chainanalysis: Ethereum continues to be one of the most commonly used blockchains for conducting scams against otherwise unsuspecting patrons.
Considering that its research took a strong look at projects and outstanding issues across 2018, the organization saw a marked increase in the sophistication of scams taking place using the Ethereum blockchain. It does have to be mentioned, however, that the number of scams taking place has dropped by a large number over the course of its history. But this does demonstrate that scammers are having to get more creative, and calculated in their approach.
One of the ways that we see this sophistication paying off is in the amount of money they are able to siphon off from the community. While the number of scams decreased by a large margin, the amount of money hasn’t; more than double when compared to 2017 ($17m in contrast to $36m in 2018). While this is only reflective of roughly .01% of the total number of Ethereum that’s in circulation amongst users, that’s hardly any consolation to those that are hapless victims of scams.
Ethereum – Voted Most Popular for Cryptocurrency Scams
As part of its extensive research report, Chainanalysis took the time to identify the number of fraudulent addresses which existed within the Ethereum ecosystem. Overall, it found that over 2,000 were scam addresses, all of which had managed to obtain a large amount of ETH from more than 40,000 users in Ethereum. Since 2016, the overall objectives of these scammers have changed dramatically; moving from otherwise thinly veiled scams, to increasingly sophisticated ones, according to research compiled by the Chainanalysis team.
While scams are becoming more and more sophisticated, there is still a diverse range of more ‘simplistic’ schemes that exist. These range from ICO exit scams, Ponzi schemes as well as phishing scams are still commonplace within the ecosystem.
While phishing scams have been commonplace across phone, internet, and now blockchain systems. Interestingly, it was this kind of scam that became ‘all the rage’ in 2017. But with the increase in popularity of these attacks, it resulted in an ever-increasing vigilance towards them within the network, diminishing their effectiveness.
But while Phishing scams brought diminishing returns, this created evolution, as opposed to less scams. Resulting in the creation of ever more sophisticated means of conning people. These ranged from the rise of incredibly convincing Ponzi schemes, as well as Initial Coin Offerings, which would often result in an ICO exit scam, resulting in the scammers often walking away with millions.
There are a number of reasons for the popularity of Ethereum amongst scammers in the blockchain world: One is due to its immense popularity amongst developers, especially as it is the most widely used blockchain for project development. It’s as a result of this popularity that scammers use it: it allows for as streamlined an onboarding for new projects as possible, allowing them to establish and launch their own crypto tokens and organize an ICO around it.
For anyone looking to organize some kind of scam around an ICO or Ponzi, then it doesn’t take too much in the way of time or effort to create a highly convincing website, a business proposal as well as a roadmap and white paper in order to convince people, to a significant enough degree to get people interested in their project. These scams were made far easier to believe by the fact that 2017 was a bullish year for the cryptocurrency world, meaning that both investors were carried away by crypto-fever, or were blinded by the risk-reward ratio that they were willing to take the risks.
The Scam Triumvirate
While Ethereum is one of the more commonly used platforms by con artists and scammers. It’s not known as being the best kind of environment for scammers to engage in cons, which is partly a good thing. One of the facts that matter for the Ethereum blockchain is that it’s still the blockchain of choice for entrepreneurial-minded individuals to begin, get funded, and launch on. According to more information that was provided in the research from Chainanalysis, more than 80 percent of all ICOs that exist in the cryptocurrency world was created and launched on Ethereum.
It is due to this reputation as the ground floor for entrepreneurs and ambitious new projects, that con artists were able to go on the hunt for otherwise unknowing, and bullish victims. In order to successfully do this, they used one of these three kinds of scams:
ICO Exits: These have become increasingly popular among con artists. These criminals would start off by creating a website along with setting up a fake company / project, backing it up with documentation which served to increase the appearance of credibility to investors that were steadily moving from bullish, to bearish between 2017 and 2018.
Any funds that were obtained through its eventual ICO would then be effectively sold off, with all of the capital being withdrawn. Inevitably resulting in satisfied scammers and unfortunate victims which are left empty-handed as a result.
Ponzi Schemes: These emerged as a spiritual successor in the line-up of scams, and have become increasingly popular. While rather easy to point out among the more experienced investors, these scams promise exceptionally high returns on any initial investment. Where these returns were coming from was anyone that invested in the ‘project’ after other investors.
The end result is inevitable that the scammers will walk away with the money, crashing the value of the token, and catching people between the rock and a hard place of holding a now worthless token and having lost their money.
Phishing: Since 2016/17, Phishing scams have been the most widely known and used kinds of scams among con artists within the Ethereum network. The underlying plan is this: con artists will send their would-be victim’s emails, phone calls or instant messages in order to trick them into handing over sensitive information to do with their digital asset / token wallets.
End result? the scammer gets direct access to a victim’s digital wallet, making away with their money in whatever medium it happens to be in.
According to the research of Chainanalysis, phishing scams are some of the most commonly occurring scams to take place on the Ethereum blockchain and known to be the single most popular means of scamming on Ethereum in 2017.
But as these scams became increasingly commonplace, users became increasingly aware of them, knocking at their effectiveness. Along with this, as criminals began to change the methods of approach for con artistry, the medium level of money that was stolen through these kinds of scams appeared to decrease over time.
This is further demonstrated through Chainanalysis’ research which, in 2018, demonstrated that the average amount sent to a scam was more than $50 less than that amount sent during the market of 2017, equalling $94 on average. The average total revenue that was earned off the back of these scams also plummeted down to $2,500 in 2018, a fall of over $4,000 when compared to 2017.
While we see an increase in the number of scam operations that use Phishing. Of the 181 scams that were in operation in 2018, over a third of these same scams made less than $10, demonstrating that, while they were on the rise, this is in terms of quantity alone, thanks to the increased savviness of investors, and an ever increasingly bearish marketplace.
Where Phishing Fails, ICO Exits and Ponzis Succeed
We are seeing scammers enter a world of diminishing returns for their ‘efforts.’ Where 2017 saw more in the way of hundreds of thousands and millions of dollars in returns. 2018 is not the case at all, with only a handful proving capable of stealing large quantities of money.
The decrease in the number of scams capable of stealing millions of dollars from users does indicate to us that criminals have had to innovate in order to dupe possible victims within the ecosystem, resulting in the creation of elaborate scams in order to obtain the trust of an ever-increasingly skeptical investor base, and a bearish market. It’s with this in mind that Chainanalysis demonstrates that this approach on quality of scams is paying off; with users losing up to 4 times what they would have last year compared to the market in 2017.
As we neared the conclusion of 2018, Chainanalysis reported that there were significant spikes in financial yields. These spikes were reportedly from a couple of various scams, ranging from Ponzi schemes to ICO Exit scams.
The data provided both by Chainanalysis directly, and cited by them, come from another highly reputable crypto-based analytics firm called Ciphertrace, which goes on to argue that roughly $725 million has been lost over the course of 2018 thanks to scams such as phony ICOs and exit scams, as well as through Ponzi schemes.
So while we have seen a drastic change in the way that scams are conducted on the Ethereum network, it is a trend that is going to continue, according to the research company – Chainalysis.
The report goes on to argue that, given the nature of technologies such as blockchain operate in a decentralized and, consequently anonymous nature, criminals of varying scopes will go on to use it as a means of financing and carrying out crimes.
An entirely decentralized system of communication, co-ordinating and financing is being created. And while this is a net positive for what we have all been seeking out as a ‘true’ direct democracy, the end result is that, as democracy becomes decentralized and sophisticated, so too will criminal activity. But is regulation going to be the best way of countering this? Or is it going to be the unfortunate consequence of freedom?