Majority of DEX Liquidity Pools Manipulated by Wash Trading: Report
Posted by Colin Lambert. Last updated: September 13, 2023
The latest market manipulation report from trade surveillance and risk monitoring software provider Solidus Labs, has found that crypto token deployers and liquidity providers have wash-traded at minimum $2 billion worth of cryptocurrency on Ethereum-based decentralised exchanges (DEXs) since 2020.
The report, which follows a similar report into insider trading in crypto markets earlier this year, finds that from a sample of approximately 30,000 DEX liquidity pools, 67% were manipulated by wash traders – traders who executed transparent or obfuscated self-trades solely to produce artificial movements in crypto tokens’ prices or volumes.
The report says that wash trading constituted 16% of the total trading volume of these manipulated pools, that, given the sample size of pools reviewed, is a lower-bound estimate of DEX-based wash trading volume.
“Market manipulation remains a significant challenge within the crypto industry, especially in an era of greater regulatory scrutiny and institutional adoption,” says Asaf Meir, Solidus Labs’ founder and CEO. “The wash trading activity we have unearthed here is a clear sign of market manipulation, and it must be prevented for crypto and DeFi to flourish.”
The firm says in DeFi, the fragmentation of liquidity across various DEXs makes for smaller markets that are more susceptible to price and volume manipulation. In one instance, Solidus says it identified a group of connected wallets that facilitated the wash-trading of a meme token named “SHIBAFARM” to attract speculators, manipulate its price, and then pull the rug on those speculators for a profit of more than $2 million.
Wash trading is well-addressed in traditional markets through trade surveillance and self-trade prevention mechanisms; and Solidus says that it is just as detectable and preventable on DEXs, however a regulatory question remains regarding who is responsible for on-chain wash trading detection and prevention.