Token price manipulation is rampant on Ethereum-based decentralized exchanges, where so-called wash trading amounted to at least $2 billion worth of crytocurrencies since September 2020, according to a study by researcher Solidus Labs.
(Bloomberg) — Token price manipulation is rampant on Ethereum-based decentralized exchanges, where so-called wash trading amounted to at least $2 billion worth of crytocurrencies since September 2020, according to a study by researcher Solidus Labs.
Wash trading, a form of market price manipulation where a trader buys and sells a security, can involve token issuers and other parties selling a coin to themselves to boost its price and trading volume — and to make it a viable candidate for being listed on centralized exchanges.
Solidus found that liquidity providers manipulated prices and volumes of more than 20,000 tokens since September 2020, according to the study, examining wash trading on three decentralized exchanges (dexes), where users can trade directly with each other.
In aggregate, liquidity providers executed wash trades in 67% of about 30,000 liquidity pools on decentralized exchanges in Solidus’s sample, with wash trading constituting 13% of the pools’ total trading volumes, according to the report.
“We were looking at 1% of all pools,” by count, Will Kueshner, a researcher at Solidus, said in an interview. “Probably the true magnitude of wash trading on dexes is an order of magnitude larger.”
Decentralized-finance services are getting more attention lately, with the Commodity Futures Trading Commission bringing enforcement actions against three firms in September.
Read more: CFTC Focuses on DeFi Platforms in Latest US Crypto Crackdown
Wash trading on Ethereum doesn’t come cheap, with each trade likely costing between $1 and $5, according to Solidus. But profits can make up for it. For example, the deployer of token Shibafarm made approximated $2 million in profits in the span of two hours in May 2021 by withdrawing two-sided liquidity from the pool, according to Solidus.
When Shibafarm debuted in 2021, its deployer used software that made it impossible for buyers to sell the coin, according to the Solidus report. The deployer also created 25 supposedly distinct parties that made more than 30 swaps of the token, accounting for more than 40% of its trading volume in a process that helped boost the price of Shibafarm, according to Solidus.
Solidus is a New York-based company that specializes in ways to monitor suspicious crypto transactions. Its founders include Asaf Meir and Praveen Kumar, two former employees of Goldman Sachs Group Inc.’s trading-technology operations.
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