Dissecting Liquidity Mining Fraud: Fraud Tactics, Victimization Patterns, Malicious Smart Contracts, and Platform Accountability

Liquidity mining fraud, a form of cryptocurrency investment fraud, has emerged as a significant source of financial loss, yet relatively little is known about the structural dynamics of this fraud. This study uses a mixed-methods analysis of arbitration filings involving Coinbase as a unique source of detailed victim accounts. We analyze an arbitration document and two supplemental filings that include 114 victim accounts of liquidity mining fraud linked to malicious smart contracts that exploited platform vulnerabilities. Our analysis identifies victim characteristics, victimization and offending patterns, the impact of liquidity mining fraud, the anatomy of the fraud, and the elements that enable it. Our findings revealed a similar method of operation across cases: combining trust and relationship fraud to trick users into using fraudulent investment platforms and executing a malicious smart contract that grants offenders unrestricted access to users’ wallets, allowing them to drain them. The findings also highlight the important role that platform design and user perceptions play in facilitating victimization. These results can inform policy discussions, cryptocurrency platform measures, criminal justice practices, and future research on cryptocurrency fraud and dispute resolution.