Learn Crypto Basics

A smart contract is a program that lives on a blockchain and runs automatically when certain conditions are met. In crypto, every token is defined by a smart contract — it controls who owns what, how many tokens exist, and what rules govern transfers.

Unlike traditional software, smart contracts cannot be updated by a central company once deployed (unless they are built with an upgrade mechanism). This means the code is the law — which is why auditing it matters.

Red flag: a contract that can be upgraded or self-destructed gives the creator a backdoor to change the rules after you invest.

A honeypot is a scam token designed to attract buyers but prevent them from ever selling. The contract looks normal — you can buy tokens freely — but the sell function is blocked by hidden code. Your money goes in, and it never comes back.

Honeypots are usually promoted heavily on social media with promises of fast gains. Once enough people have bought in, the creators drain the liquidity and disappear.

TokenSentry simulates both a buy and a sell transaction before you invest, to detect this before it affects you.

A rug pull happens when the team behind a token removes all the liquidity from the trading pool, leaving holders with tokens that are now worthless. The price crashes to zero instantly.

Rug pulls can happen in seconds. A project can look legitimate for weeks — it may have a website, a roadmap, and social media presence — and still be a planned exit scam.

The most common indicators: liquidity is not locked, the team holds a large percentage of tokens, or there are contract functions that allow the owner to pause transfers or mint new tokens.

On decentralised exchanges (DEXes) like Uniswap, tokens are traded against a liquidity pool — a reserve of funds that allows buyers and sellers to trade without needing a matching counterpart.

Low liquidity means high price impact: even a small sell order can drop the price significantly. It also means a large sell could drain the entire pool.

When creators provide liquidity, they receive LP (liquidity provider) tokens. If those LP tokens are not locked in a smart contract, the creators can withdraw the pool at any time — this is a rug pull.

LP locking means the liquidity provider tokens (LP tokens) are deposited into a time-locked contract, preventing the team from withdrawing liquidity before the lock expires.

A project with locked liquidity cannot rug pull during the lock period. However: locks can expire, they may cover only a small percentage of total liquidity, or the lock contract itself might have weaknesses.

TokenSentry checks both whether liquidity is locked and what percentage of LP tokens are covered by the lock.

Some tokens charge a percentage fee on every transaction. These fees may go to holders, a treasury, or be burned. Small taxes (1-5%) are common in DeFi. Large taxes are a serious red flag.

High taxes can make a token unprofitable to trade. Worse, many contracts allow the owner to change the tax rate at any time — including raising it to 100%, which effectively traps all holders.

TokenSentry flags sell taxes above 10% as medium risk and above 25% as high risk.

A whale is any wallet that controls enough tokens to significantly move the market when they buy or sell. If one wallet holds 50% of all tokens, their sell order will crash the price by half.

Whale concentration is not always malicious — early investors, team members, or large funds may legitimately hold large positions. But it is always a risk factor, because their decision to sell has an outsized impact on every other holder.

TokenSentry checks the top 10 holders and flags if any single non-DEX wallet controls more than 20% of supply.

Minting is the process of creating new tokens. If a contract has a mint function, the owner can increase the total supply at will. This dilutes every existing holder's share of the token.

An uncapped mint function with no governance is one of the most dangerous features a token contract can have. It means the creator can print infinite tokens and sell them, crashing the price to near zero.

TokenSentry flags any contract where the owner retains mint capability without restrictions.

When a developer deploys a smart contract, only compiled bytecode goes on-chain. Contract verification means the developer has also published the human-readable source code and proven it compiles to the same bytecode.

Verified contracts can be independently audited by anyone. Unverified contracts are black boxes — you cannot know what the code does without reverse-engineering the bytecode.

On Ethereum, Etherscan provides contract verification. TokenSentry flags unverified Ethereum contracts as a risk signal.

A decentralised exchange (DEX) allows users to trade tokens directly from their wallets, without depositing funds into a central platform. Examples include Uniswap (Ethereum), PancakeSwap (BNB Chain), and Raydium (Solana).

DEXes use liquidity pools instead of order books. Prices are determined by a mathematical formula based on the ratio of tokens in the pool. This is known as an Automated Market Maker (AMM).

Most new tokens launch on DEXes before (and sometimes instead of) listing on centralised exchanges like Binance or Coinbase.