25 April, 2024

New Revelations: Ethereum-Based DEX Wash Trading’s $2 Billion Token Manipulation

13 Sep, 2023

27 Nov, 2023

  • Solidus Labs study exposes rampant wash trading on Ethereum DEXes, revealing over $2 billion in token price manipulation since September 2020.
  • Wash trading inflates a cryptocurrency’s value as token issuers and entities trade assets, artificially boosting appeal for centralized exchange listings.
  • Liquidity providers drove manipulation for 20,000+ tokens, with wash trading at 67% of DEX liquidity pools.

In a startling revelation, a study by Solidus Labs, a New York-based crypto transaction monitoring firm, has unveiled the widespread prevalence of wash trading on Ethereum-based decentralized exchanges (DEXs). Since September 2020, over $2 billion worth of cryptocurrencies have been subjected to this market price manipulation tactic.

Wash trading is a technique where traders artificially inflate a cryptocurrency’s price and trading volume by executing fake buy and sell orders, often involving token issuers and other entities trading assets to themselves. This deceptive strategy is primarily employed to make a coin appear more attractive and boost its chances of being listed on centralized exchanges.

According to a recent report, Solidus Labs delved deep into the crypto market and found that liquidity providers played a significant role in manipulating the prices and volumes of more than 20,000 tokens since September 2020. Their study focused on three prominent decentralized exchanges, platforms that enable direct peer-to-peer trading among users.

Alarming statistics emerged from Solidus’s investigation. Liquidity providers were found to be engaged in wash trading in a staggering 67% of the approximately 30,000 liquidity pools sampled, accounting for 13% of the pools’ total trading volumes.

Will Kueshner a researcher at Solidus, expressed concern, stating,

We were looking at 1% of all pools, probably the true magnitude of wash trading on dexes is an order of magnitude larger.

The rise of decentralized finance (DeFi) has brought greater attention to the crypto market. In September, the Commodity Futures Trading Commission (CFTC) took enforcement actions against three firms suspected of engaging in illicit activities within the DeFi sector.

The Solidus report also shed light on the cost of wash trading on the Ethereum network, estimating that each trade incurred expenses ranging from $1 to $5. However, the potential profits far outweighed these costs. For instance, the creator of the Shibafarm token reportedly generated approximately $2 million in profits within a mere two-hour period in May 2021 by manipulating liquidity from a pool.

Shibafarm’s debut in 2021 was marred by manipulative tactics, as its creator employed software to prevent legitimate buyers from selling the coin. The creator also orchestrated over 30 token swaps involving 25 seemingly distinct parties, accounting for more than 40% of Shibafarm’s trading volume. According to Solidus, these maneuvers significantly contributed to the token’s price boost.



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