How to Avoid Fraud on the Ethereum Network – Part 1

One of the biggest advantages of blockchain networks such as Ethereum and Bitcoin is that they are decentralized. This means that there is no authority that can suddenly issue more currency or withdraw currency from circulation.

Satoshi Nakamoto introduced bitcoin right after the financial crisis of 2007/2008. One of the reasons for the financial crisis was subprime mortgage crisis in the United States, which occurred because big banks were running their businesses on a set of wrong assumptions. The US government then decided that it needed to bail out some of the companies because not bailing them out would be even worse. The bailout meant increasing the debt of the country, essentially making the general public pay for the mistakes of the few key players. A scenario like this can’t occur on a public blockchain network because there is no central authority.

At the same time, having no central authority comes with its own disadvantages. Today, if you pay for products or services with a debit card or credit card and become a victim of fraud or receive a defective product, you can call your bank and dispute or reverse a transaction. This is not something that can occur on the Bitcoin network or Ethereum network. Once you create a transaction and the transaction gets confirmation on the network, the transaction is over. There is no phone number you can call to dispute the transaction, no email, no chat support, no central authority that you can appeal to and explain your situation. The ethereum network partially solved this issue by introducing smart contracts, but there are still a lot of ways to become a victim of fraud when dealing with cryptocurrencies.

Just like there are a lot of scammers out there trying to get your regular money, there are a lot of scammers in the virtual world trying to get your digital money. Below you will find a description of several ways of how fraudulent schemes work on the Ethereum networks and what you can do to keep your money safe.

This being said, the speed of innovation in the world is increasing. The innovation is especially fast in the digital world, including blockchain networks and cryptocurrencies. The scammers are also trying to innovate all the time, which is why you only want to deal with people and companies that have established reputations and you should never risk all of your savings in hopes to make a return quickly with an unproven idea or people that have no track record of success.


Fraudulent exchanges

The fact that there is no central authority issuing cryptocurrencies also means that there is no central authority that exchanges regular currency into cryptocurrency. Bitcoin and Ether and peer-to-peer currencies, which means that if you want to send money to someone, you can do so without a third party and you do not need services of a bank. This also means that if you want to exchange your regular currency into a cryptocurrency, you will either need to find a person who will agree to exchange his or her tokens into a regular currency based on the rate you agree on or you will need to use an online exchange. While there are quite a few exchanges that do have a solid reputation and that have been in business for a long time, there are also fraudulent exchanges that are looking to scam naïve first-time buyers.

Some of the reputable exchanges are Kraken and Coinbase. Kraken has been in business since 2011 and Coinbase opened in 2012. Both companies are based in San Francisco, California and operate under the US law.

When using a cryptocurrency exchange, check the country of its registration. Fraudulent exchanges would typically be registered in some exotic islands, meaning that you will have a hard time getting your regular money or cryptocurrency tokens back should things go wrong.

The next factor you want to consider is the length of time an exchange has been in business. Most reputable exchanges have been in business for about 5 years. Dealing with a new exchange carries its own risks because such an exchange may not have established relationships with banks or software that provides sufficient security. In the past, there have been several cases where exchanges had money stolen from them by hackers or had banks refusing to work with them.

The most famous of such exchanges was Mt. Gox. Mt. Gox was an exchange that operated out of Tokyo, Japan. It was created in 2010. By 2013, it was the biggest cryptocurrency exchange in the world, handling over 70% of all bitcoin transactions. The exchange suspended trading and shut down its website in February of 2014. Mt. Gox announced that it couldn’t account for about 850,000 bitcoins, at the time valued at about $450 million. Later investigations have shown that most of the coins have been stolen from the exchange. The CEO of Mt. Gox was arrested by the Japanese authorities in August of 2015 and charged with fraud and embezzlement.