Solidus Labs, a prominent market surveillance firm, has exposed a deeply concerning facet of the crypto world. Their findings lay bare a troubling truth: over the past three years, manipulation has run rampant, more than 20,000 cryptocurrency tokens through a deceptive practice known as decentralized exchange (DEX) wash trading.
This startling exposé comes to us through their latest report, the 2023 Crypto Market Manipulation Report Part II, a document that showed the truth on September 12. The implications of this revelation are profound, casting a long shadow over the integrity of the cryptocurrency market.
Solidus Labs’ findings are nothing short of alarming. Among 30,000 Ethereum-based DEX liquidity pools surveyed, a staggering 70% were found to have engaged in wash trades since September 2020, amassing a jaw-dropping $2 billion worth of crypto in the process. Wash trading, a deceitful practice where an entity buys and sells the same asset to fabricate market activity, has reared its ugly head in the crypto realm with alarming frequency.
“In crypto, liquidity is fragmented across a variety of centralized and decentralized exchanges, resulting in smaller markets that are easier to manipulate,” Solidus remarked. Unlike traditional finance, where such manipulation exists but is typically harder to execute, crypto’s decentralized nature provides fertile ground for these illicit activities.
Solidus noted that wash traders come from various backgrounds and motives. They include token creators looking for straight rug pulls as then enter the market, speculators trying to exploit token giveaways, and exchange operators inflating their trading volumes to attract more users and investors.
In 2022, a study by the National Bureau of Economic Research sent shockwaves through the crypto community, revealing that more than 70% of unregulated exchange volumes were tainted by wash trades. These deceptive practices not only distort exchange rankings on platforms like CoinMarketCap and CoinGecko but also have a short-term impact on crypto prices within these exchanges.
The question of who bears the responsibility for detecting and preventing on-chain wash trading remains contentious due to the borderless nature of decentralized finance. This regulatory quagmire adds to the urgency of addressing this pressing issue.
Market manipulation remains a significant challenge within the crypto industry, especially in an era of greater regulatory scrutiny and institutional adoption. 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
Solidus Labs’ founder and CEO, Asaf Meir.
Wash traders, as Solidus Labs has uncovered, come in various guises, from token deployers seeking an easy rug pull to speculators attempting to game upcoming token airdrops. Even exchange and marketplace operators have succumbed to the temptation, falsely reporting inflated trading volumes to attract investors and users.