Signs of Malicious Smart Contracts: Web Security Guide3

In the context of the digital economy shifting strongly to decentralized protocols, smart contracts have become the backbone of all financial activities on the blockchain. However, the immutability and self-execution of source code — which are the pillars of trust in Web3 — are being exploited by cybercriminal organizations to create sophisticated forms of fraud. This report delves into the architectural analysis of malicious smart contracts, from basic approval vulnerabilities to honeypot traps and artificial intelligence (AI)-based attack mechanisms in the period 2025-2026.

Actual data compiled by Tan Phat Digital shows the serious nature of the problem: in the first half of 2025, the total value of assets stolen in crimes related to Cryptocurrency has reached a record $1.93 billion, surpassing the total for the whole of 2024. Phishing attacks are no longer based on simple fake websites but have shifted to "compound attacks", combining system manipulation, wallet authority and protocol logic. In particular, the intervention of AI agents in finding and exploiting vulnerabilities has increased the effectiveness of attacks, with revenue from AI-powered scams being 4.5 times higher than traditional methods.

Architecture and Vulnerabilities in Token Approval Mechanisms (Token Approval)

Approval mechanisms (Approval) mechanisms are a fundamental component of token standards such as ERC-20, allows users to authorize third-party addresses to move assets on their behalf. This is the core mechanism that helps decentralized finance (DeFi) applications operate smoothly. However, erroneous implementation or abuse of this mechanism has become one of the security "dead spots" that users often overlook.

Unlimited Approval and System Risk

In the ERC-20 standard, the function approve(address spender, uint256 amount) requires the delegate address and the maximum number of tokens. To optimize experience and save gas, many dApps require "unlimited approval" permissions ($2^{256}-1$). Once granted, this right is permanent until revoked. If the contract is compromised, an attacker can drain your entire current and future balance without further confirmation.

Analyzing Race Conditions in the Approve Function

When the user changes the approval limit from the value $x$ to $y$, the attacker can observe the transaction in the mempool and execute a transferFrom command in the amount of $x$ immediately before the new command is executed, then continues to withdraw more $y$. The total loss is $x+y$. Experts at Tan Phat Digital note that libraries like OpenZeppelin now recommend using increaseAllowance to minimize this risk.

Analysis of popular approval models

Standard Approve (ERC-20): Done via on-chain transaction to establish allowance. Compatible with legacy dApps but has high gas fees and is vulnerable to unlimited or front-running approval risks.
Permit (EIP-2612): Use off-chain message signing (EIP-712). Saves gas and has a fast experience but is easily fooled into signing fake messages that leave no on-chain trace.
Permit2 (Uniswap): One-time approval for Uniswap's Permit2 contract. Supports centralized management and clustering of transactions, but creates a "Master Approval" — a fatal weakness if exploited.
SetApprovalForAll (ERC-721): Authorizes the entire NFT collection. This is a necessary requirement for NFT exchanges but carries the potential risk of losing all assets with just one wrong sign.

See more: What is a Smart Contract? Things to know about Smart Contract

Dangers from SetApprovalForAll and NFT Phishing

For NFTs (ERC-721/1155), the setApprovalForAll function authorizes an "operator" to move all NFTs belonging to a specific user contract. Attackers often trick users into signing this command via fake "Free Mint" or "Airdrop" websites. Once they have power, they will use toolkits like Angel Drainer to empty their wallets. According to Tan Phat Digital, the lack of a multi-address approval mechanism for each NFT has unintentionally pushed users into a position of having to accept high risks in exchange for convenience.

Backdoor Administrative Rights and Upgradeable Contracts

Many "Rug Pull" projects use administrative backdoors to appropriate assets after gaining the community's trust.

Administrative Functions abused

Infinite mint function: The owner prints unlimited tokens to release to the market, reducing the value of the user's assets to 0.
Permanent pause function: Locks all transfer and receipt activities of the user to carry out the act of usurping funds clause.
The blacklist function: Prevents specific wallet addresses from being transacted, typically for buyers immediately after they deposit funds.

Attackers also often use the Proxy model to deploy clean source code initially, then use the upgradeTo function to replace it with malicious logic after the project reaches a certain amount of TVL (total price). certain key value.

In-depth Analysis of Honeypot Traps

Honeypot is a type of contract that contains logical traps that prevent money deposited from being withdrawn.

Reentrancy Trap (Hacker Trap): Creating the appearance of being vulnerable to Reentrancy attacks to trick people with programming knowledge into depositing money to "hack". However, the withdrawal function was blocked by a hidden logic that caused all withdrawal attempts by the "hacker" to fail and the decoy money was stuck.
Obfuscation Technique: Using variables with the same name in inheritance or imposing a sales tax of up to 99% to eliminate users' profits.

The easiest sign to identify a Honeypot on Explorer is the "color only" candlestick chart green" (only buy, not sell) and the number of holders increases continuously but there are no transfers.

Unverified Source Code and the Problem of Fake Audits

Transparency is the foundation of Web3, but scammers often hide the source code as unreadable bytecode. In addition, falsifying audit reports from reputable units such as CertiK or Hacken is becoming a painful problem.

Instructions for verifying reputable audit units

CertiK: The report must have a direct link to the Skynet control panel. Verified at: Certik.com/projects.
Hacken: Report is publicly available on GitHub and the organization is ISO 27001 certified. Verified at: Hacken.io/audits.
OpenZeppelin: Provider of standards libraries, reports are always extremely detailed at: Blog.openzeppelin.com.
Sherlock: Use the community audit model with transparent reporting at: Sherlock.xyz.

See more: How dangerous is approval scam and why so many people fall for it

New Attack Trend: AI and Supply Chain

Entering 2026, AI has helped scammers create news Phishing messages with no spelling errors and extremely convincing Deepfake videos. Supply chain attacks targeting open source libraries are also increasing, typically the SagaEVM hack in early 2026 causing $7 million in losses due to legacy vulnerabilities.

Typical DeFi hacks in January 2026

Step Finance: $30.0 million lost due to private key compromise (Private keys). Lesson: Use multi-signature wallets and cold storage.
Truebit: $26.4 million lost due to old source code bug that allowed for free token minting. Lesson: Re-audit old source code when integrating new systems.
SwapNet: $13.4 million lost due to arbitrary function call vulnerability. Lesson: Strictly control input data.
SagaEVM: Lost 7.0 million USD due to supply chain attack. Lesson: Carefully evaluate source code inherited from other projects.
MakinaFi: Lost 4.1 million USD due to liquidity pool logic error. Lesson: Auditing edge cases in DeFi logic.

Protection Strategies and Analysis Tools for Users

To protect assets, Tan Phat Digital recommends users to build a multi-layered defense system:

Use automated tools: Check contract addresses via Token Sniffer (safety score), GoPlus Security (scan for hidden risks), and Honeypot.is (detect selling traps).
Manual appraisal: Always get the contract address from CoinGecko/CoinMarketCap. Use Rabby wallet to simulate transactions (Transaction Simulation) before signing.
Manage approval permissions: Periodically visit Revoke.cash to cancel approval permissions for applications that are no longer in use. This is the most important measure to prevent silent withdrawals.

Frequently Asked Questions (FAQ)

What is Unlimited Approval? It is when you authorize a dApp to spend up to 2^256 - 1 token in the wallet. This is convenient but extremely dangerous if the dApp is hacked or is a scam.
How to revoke token approval? You should use tools like Revoke.cash (Ethereum) or Solscan (Solana) to periodically check and remove unnecessary access permissions.
Mechanism What is "SetApprovalForAll" in NFT? This is a permission that allows a third party (like an exchange) to move all NFTs in your specific collection.
Why do NFT exchanges ask for the "SetApprovalForAll" permission? To allow them to automatically transfer NFTs to buyers when the transaction is complete, without you having to sign off on each small order
What is the clearest sign of a honeypot token? The price chart has only green candles (buy orders) with absolutely no sell orders from regular users for many hours.
How does "Balance Disorder" in honeypot work? Scammers trick users into thinking that if they send an amount of ETH larger than the contract's current balance, they will receive all their money back, but in reality In fact, contract logic prevents that.
How does the "Reentrancy Bait" trick hackers?The contract intentionally exposes a "fake" Reentrancy vulnerability. When a hacker deposits money to attack, a hidden function will trigger the revert command, causing the hacker to lose all of the bait money.
What harm does the infinite "Mint" function do to investors? The project owner can print billions of additional tokens, diluting the value and causing the price of the tokens you hold to drop to nearly zero immediately.
Why should you not interact with the raw source code? Verify? Because the source code in bytecode form is unreadable, completely hiding withdrawal orders or malicious backdoors.
How to know the audit is real? Please directly visit the official website of the auditing unit (eg CertiK Skynet) and search for the contract address to compare, instead of believing in screenshots.
Risks What is the risk of a "Permit" signature (EIP-2612)?An attacker can trick you into signing an off-chain message (no gas) that grants permission to spend tokens without your knowledge until the wallet is emptied.
What is the difference between "Permit" and "Permit2"? Permit is built into the token, while Permit2 (from Uniswap) is an intermediary contract allows mass approval of many types of tokens at the same time with a single signature.
Is "Transaction Simulation" absolutely safe? It helps you foresee the transaction results (for example: "You will lose 10 ETH"), but cannot detect slow activation logic traps or upgrade the contract later.
What to do if you accidentally sign a contract suspected of being malicious harmful? Immediately use Revoke.cash to cancel approval and transfer remaining assets to a new, more secure wallet.
Can Etherscan help detect scams? Yes, you can check the "Contract" section to see if the source code is verified, check the transaction history for "buy only don't sell" patterns, and read comments from the community.

The growth of the malicious smart contract ecosystem shows that attacks are becoming more and more sophisticated. The final advice from Tan Phat Digital for all investors is to always keep a "Zero Trust" mindset. Every transaction and signature is potentially risky if not carefully verified. Prioritize safety over convenience and use cold wallets for long-term accumulated assets.