When investing in memecoins or shitcoins, it’s crucial to do your own research (DYOR) and conduct proper due diligence before committing any funds. This process involves several steps, including analyzing the holders' distribution and understanding the smart contract to identify potential risks like honeypots.
1. Understanding the Holders Distribution
Check the Top Holders: Use blockchain explorers like Etherscan or BscScan to view the distribution of token holders. Focus on how many tokens the top wallets control. If a few wallets hold a large percentage (e.g., 5-10 holders controlling 50%+ of the supply), it’s a red flag. Such concentration can lead to significant price drops if these holders decide to sell their tokens.Liquidity Pool: Inspect the liquidity pool's allocation. A healthy liquidity pool with a good ratio between the token and a stable coin like USDT or BNB suggests stability. Beware of low liquidity, as it can make price manipulation easier for large holders.Team and Developer Wallets: Review the wallets associated with the development team or marketing allocations. If these wallets are consistently selling large portions, it could indicate a lack of long-term commitment to the project.
2. Reading the Contract to Identify a Honeypot
A honeypot is a malicious contract that allows users to buy a token but prevents them from selling it, trapping investors’ funds. Here’s how to spot potential honeypots through contract analysis:
Check Transfer Functions: When analyzing a contract, pay attention to functions that govern buying, selling, and transferring tokens, such as transfer, transferFrom, and approve. Honeypot contracts often include hidden restrictions on selling.Use a Honeypot Checker Tool: Tools like Honeypot.is or Token Sniffer can simulate transactions to check if selling is blocked or restricted. However, these tools are not foolproof, so manual checks are essential.Read the Source Code for Fee Adjustments: Malicious contracts may include functions that allow the owner to set excessive transaction fees (e.g., 99%) on sells. Look for functions like setTaxFee or setSellFee that could be manipulated.Check Contract Ownership: If the contract ownership hasn’t been renounced, the project owners can still change contract parameters. This can be risky if the team has the ability to modify fees or blacklist wallets. A renounced contract, however, limits these changes but may also restrict positive upgrades.Look for Blacklisting Functions: Some contracts have functions that allow the owner to blacklist addresses. This can be used to trap users, making their tokens unsellable.
Final Thoughts
DYOR and due diligence are vital in navigating the volatile and speculative world of memecoins and shitcoins. Understanding holders' distributions and identifying honeypots through contract analysis can help you make more informed investment decisions, protecting yourself from scams and minimizing risks.
