What is a Honeypot?

Honeypots are cleverly designed smart contracts that look like they have a critical flaw, allowing anyone to drain Ether (Ethereum’s native currency) if they send a specific amount of Ether to the contract first. Sounds easy, right? But here’s the catch: when a user tries to exploit this seemingly juicy loophole, a hidden second trapdoor kicks in, blocking the Ether drain entirely. Sneaky, huh? So, what’s the real deal with honeypots?

The whole idea is to lure victims into focusing solely on the visible vulnerability while completely missing the hidden trap lying in wait. Honeypot scams rely on human nature—greed, assumptions, and a knack for underestimating risks. They trick people into thinking they’ve found a shortcut to free crypto riches, only for the tables to turn at the last second.

But here’s the million-dollar question: how do honeypots work?

How Do Honeypots Work?

In crypto honeypot scams, the victim’s funds end up trapped in the smart contract, with only the attacker (the honeypot’s creator) having the key to retrieve them. It’s a one-sided game where the house always wins.

Setting up a honeypot on Ethereum smart contracts doesn’t require a mastermind coder. In fact, attackers only need the same basic skills as any average Ethereum user. All it takes is enough capital to create and "prime" the smart contract, making it look enticing. Essentially, a honeypot setup is like a decoy system: it mimics the behavior of something valuable—like IoT devices, banking systems, or public networks—while being fully isolated and under surveillance.

Though it might seem like part of the network, a honeypot is cordoned off and monitored closely. Legitimate users have no reason to interact with it, so any attempts to engage are flagged as hostile. Honeypots are often placed in a network’s Demilitarized Zone (DMZ), a segment that separates it from the main production network while still keeping it accessible for monitoring. This setup allows attackers to "play" with the honeypot without risking exposure to the critical network infrastructure.

Sometimes, honeypots are stationed outside the external firewall, directly facing the internet, to lure attackers targeting internal networks. The exact placement of the decoy depends on how complex it is, the type of traffic it aims to attract, and its proximity to valuable assets. However, regardless of its location, a honeypot is always isolated from the main production environment to ensure safety.

It's a clever game of cat and mouse—but in this case, the mouse has no idea it’s walking straight into a trap.

Examples

Squid Game: The Squid Game token honeypot scam in November 2021 became one of the most infamous crypto frauds. The creators of the SQUID token swindled approximately $6.38 million worth of BNB, cleverly laundering the stolen funds through the cryptocurrency mixer Tornado Cash.

Despite glaring red flags—like holders being unable to sell their tokens, spun as "innovative anti-dumping tech"—the token gained massive traction due to the popularity of the Netflix series Squid Game. It highlights how hype can overshadow caution, even when warning signs are blatant.

Related terms

Phishing: A fraudulent attempt to trick individuals into revealing sensitive information often used to gain access to crypto wallets or accounts.