Understanding The Latest Cryptocurrency Scam: Monero Gold
Originally published on: BTCMANAGER
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February 06, 2018
The relatively young and unregulated cryptocurrency space is, unfortunately, a fertile breeding ground for criminals looking to score a quick buck. The lack of regulation coupled with the expanding interest from the general public continues to attract a substantial amount of fraudsters, with methods ranging from rudimentary and uncomplicated to the most cunning and sophisticated.
When bitcoin started trading in 2009, the most common type of scam was different variations of the Ponzi scheme. Criminals would promise high returns to those who participated in their bitcoin investment or cloud mining platforms. The profit they received, however, were simply the funds paid by new users. Naturally, these large returns would dwindle and eventually stop as the number of new users slowed down at which point the scheme operators usually disappear with their victim’s funds.
As blockchain technology began to be applied in a wide array of different ways, the initial coin offering (ICO) was introduced as a method through which blockchain-based startups were able to fund their projects. An ICO raises funds when investors purchase a newly issued digital token offered by the project using cryptocurrencies such as bitcoin or ethereum.
While large blockchain companies, such as digital currency exchanges, are now held to a regulatory standard and are required to create and uphold sufficient KYC and AML practices, there is still a significant portion of the space that is unregulated. ICOs fall within this largely open portion of the market.
In addition to allowing contributions from any kind of depositor, both high value and low capital investors from across the globe, the lack of restrictions makes it easy for projects to raise large amounts of money within a relatively short amount of time. However, with large portions of the public looking to invest in cryptocurrencies and the relative ease of creating a project with an ICO, it is an unfortunate reality that ICO scams are increasing in frequency.
What is Monero?
Monero (XMR) is arguably the most anonymous cryptocurrency in the market today. Created as a hard fork of Bytecoin, this altcoin is popular due to its privacy-focused features. It is based on Cryptonote, a mechanism released through a whitepaper in 2013.
Nicolas van Saberhagen, the creator of the Cryptonote mechanism, noted that while bitcoin demonstrated that peer-to-peer payments without the need for a central authority were possible, it still fell short when it came to preserving the privacy of its users since all transactions were publicly viewable on the blockchain. “Privacy and anonymity are the most important aspects of electronic cash. Peer-to-peer payments seek to be concealed from third party’s view, a distinct difference when compared with traditional banking,” noted Saberhagen.
In an effort to solve the problems faced by bitcoin, Saberhagen proposed the creation of a new digital coin called CryptoNote. The principles outlined within the whitepaper became the basis for a number of altcoins based on the mechanism. In addition to CryptoNote itself, Bytecoin, Forknote, Boolberry, DashCoin, and DigitalNote use the principles outlined by Saberhagen.
While Monero is a hard fork of Bytecoin, it has grown to become one of the most popular of the Cryptonote altcoins, given that the team disclosed an inflation bug present in all Cryptonote currencies (and consequently amended the fault in the Monero network). The blockchain network offers its users complete privacy and anonymity. Using ring signatures, ring confidential transactions, and stealth addresses, Monero is able to hide the information pertaining to any transactions on its blockchain. It is not possible to view details such as the amount or origin and the destination of any monero transactions.
Due to these features, Monero can stay true to the spirit of decentralization stating, “Monero provides all the benefits of a decentralized cryptocurrency, without any of the typical privacy concessions.”
Monero was developed by over 200 contributors who are committed to ensuring the altcoin continues to ensure its user’s financial privacy. Moreover, the Monero community is highly active on sites like Reddit and StackExchange.
The Monero Gold Scam
A new digital currency called Monero Gold was launched at the end of November 2017. Monero Gold (XMRG) was an ERC20 token, built on top of Ethereum’s smart contracts platform. Likely riding the wave of the rally witnessed in the cryptocurrency market in the last quarter of 2017, the value of the coin rose and was trading at $0.17, at its all-time high, on February 2, 2018, according to CoinMarketCap.
Looking at the facts, it is clear to see that Monero Gold is not affiliated with Monero, as evidenced by the entirely different infrastructure employed by the two coins. Monero prides itself on creating sophisticated privacy-enhancing technology for its users while Monero Gold was an ERC20 token that can easily be created by anyone on the Ethereum blockchain. In addition, all transactions on the ethereum blockchain are publicly viewable, the complete antithesis of Monero’s goals.
However, using the association with an established coin, the people behind Monero Gold were able to convince people to buy the otherwise useless token thus and, thereby, raising its value. While this in itself likely created a profit for the developers, the scammers behind the coin exploited a weakness in Ethereum’s smart contract platform to make even larger undeserved winnings for themselves.
Using a tool called a burn function, the creator of the Monero Gold smart contract was able to create a large number of Monero Gold coins, which he then immediately sold. This sudden influx of many coins led to inflation that rendered Monero Gold worthless.
A burn function is a tool that allows the creators of a smart contract to destroy any tokens if need be, such as in the case of unacquired tokens during an ICO. However, the Monero Gold creator(s) realized that if they burnt enough tokens such that the integer went to less than one, the contract would reset itself to the highest possible value, which they then used to inflate the market.
Monero Golds’ website has now been replaced with a pepe the frog meme giving credence to the idea that the creators had planned the overflow from the start. The cryptocurrency exchange CoinExchange released a statement on February 4, saying it had stopped supporting the coin due to the fraudulent activity witnessed in prior days. The exchange stated it would try to compensate users but was quick to emphasize it was a victim of the creators too. The relatively simple scam highlights the need to conduct adequate research before investing in any digital currency or token as it is an unfortunate reality that this market is plagued with scams and fraudulent blockchain blockchains.