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Ethereum Merge scams: Bad actors profit from paradigm shift

By Raphael Sanis

12:42, 8 September 2022

Ethereum 2.0
Bad actors are taking advantage of the upcoming Ethereum upgrade through fraudulent mining pools, airdrops, and tokens – Photo: Vector-3D / Shutterstock

Scams and fraud are nothing new in the cryptocurrency industry. Last year $14bn was taken from unsuspecting investors, according to Chainalysis. But the upcoming Ethereum (ETH) merge is providing fraudsters with a new opportunity and the blockchain has taken note.

The Ethereum foundation said: “As we approach The Merge of Ethereum Mainnet, you should be on high alert for scams trying to take advantage of users during this transition.”

The second largest cryptocurrency is moving to a proof-of-stake (POS) consensus mechanism as it seeks to reduce energy usage, transaction speeds and gas fees.

This transition is set to take place between 13 and 15 September 2022, according to Ethereum’s co-founder, Vitalik Buterin. While there are benefits for Ethereum users, there are numerous fraud risks to be wary of.

The crypto industry is rife with fraud that is usually adaptive to new trends and takes advantage of sector-wide events.

For example, the rise of decentralised finance (DeFi) in 2021 led to new opportunities for fraudsters. DeFi fraud made up 72% of cryptocurrency thefts, according to Chainalysis.

Similarly, the explosion of non-fungible tokens (NFTs) into the mainstream gave bad actors new methods to take investors’ funds.

Chainalysis pointed to the use of wash trading, where NFT prices were manipulated to earn large profits.

The imminent Ethereum transition has the potential to be another sector-defining event for scammers. The blockchain has been preparing for the Merge for more than six years, and there are already Ethereum Merge scams to be cautious of.

Fake ETH2 tokens

It could be easy to assume that such a vast upgrade would warrant a new cryptocurrency. But the Ethereum foundation has made it clear that there will not be any ETH2 token.

The foundation made clear: “Do not send your ETH anywhere in an attempt to ‘upgrade to ETH2.’ There is no ‘ETH2’ token, and there is nothing more you need to do for your funds to remain safe.”

Investors will not have to complete any swaps or upgrades for their cryptocurrency to be transferred onto the new blockchain upgrade.

But this does present an opportunity for phishing scammers to pry information about investors’ wallets and other security details. A site claiming to upgrade your Ethereum will most likely be looking to steal your funds.

Airdrop scams

A harmless-looking new Ethereum token can also be used to scam investors through airdrops.

Gold

2,407.76 Price
+0.280% 1D Chg, %
Long position overnight fee -0.0198%
Short position overnight fee 0.0116%
Overnight fee time 21:00 (UTC)
Spread 0.30

US100

19,706.30 Price
+1.000% 1D Chg, %
Long position overnight fee -0.0263%
Short position overnight fee 0.0041%
Overnight fee time 21:00 (UTC)
Spread 1.8

BTC/USD

67,451.05 Price
-0.520% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 106.00

ETH/USD

3,494.82 Price
-0.220% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 6.00

These are usually used for promotional events where tokens are dropped into wallets for free.

However, crypto criminals have used the concept to gain access to investors’ keys and subsequently their funds.

The Web 3.0 cybersecurity company Hacken said: “Fake airdrops are malicious. Their only purpose is to trick victims and get access to their financial assets. Fake airdrops are phishing scams. Victims click on phishing links and connect their digital wallets to a fake address.”

These scams require investors to log in with their wallet details when trying to redeem the allegedly airdropped tokens. All investors are doing, however, is handing over their details to bad actors.

The Ethereum Foundation is not running any official airdrops. Coin98 recommends leaving suspicious airdropped tokens alone or sending them to a burn address.

Fraudulent mining pools 

Not everyone is onboard with the new migration to proof of stake. Exchanges and well-known crypto figures, including BitTorrent’s chief executive, Justin Sun, are giving their support to proof-of-work (POW) forks, unofficial blockchains that use the old consensus mechanism.

There is already a subtype of crypto scams that take advantage of POW mining pools. These scams will present users with a seemingly official swap page for investors to send their funds to the “pool”.

These promise investors the chance to earn passive income. But the scam will instead steal the funds for good. Coinbase (COIN) estimated that more than $50m has been stolen via these scams.

It said in a Medium post in March 2022: “Recently, our security teams have uncovered ongoing mining pool scams targeting users of self-custody wallets. These scams have primarily leveraged malicious smart contracts on the Ethereum network.”

Mining pool scams can also be used to phish details from users. Global Anti-Scam Org warned: “They may come with a 24/7 ‘customer service’ chat that give you deceptive explanations.”

As the ETH merge means it will no longer use the POW consensus, investors will have to be especially careful of mining pools that promise high rewards. Thorough research and caution should accompany decisions to interact with any cryptocurrency project, including Ethereum mining pools.

Ethereum 2.0's  potential

The Ethereum merge could have the potential to transform the crypto industry, with the second largest crypto network becoming more energy and cost-efficient.

Yet there are also clear risks present. Whether it is a token or mining pool, it is crucial for investors to carry out thorough due diligence before interacting with any Ethereum 2.0 project, especially as the industry is young and largely unregulated.

Ethereum’s security advice reminds investors: “Once you lose your crypto, it is gone”.

FAQs

How to prepare for the Ethereum merge?

There is no action needed for Ethereum investors to prepare for the merge. Any ether will automatically be uploaded to the new upgrade, without any need for ethereum staking.

Investors should be wary of bad actors looking to take advantage of this event using impersonation to steal funds.

How to keep your funds secure before the merge?

Ethereum investors should be cautious of scams looking to pry funds from accounts. The Ethereum foundation warned investors not to send any ETH to those claiming to upgrade to the new consensus mechanism.

Cryptocurrency investors should also be cautious of airdropped tokens and Ethereum mining pools.

Markets in this article

ETH/USD
Ethereum / USD
3494.82 USD
-7.53 -0.220%
COIN
Coinbase Global Inc (Extended Hours)
258.40 USD
1.48 +0.580%

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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