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Crypto wash traders are drawn to decentralised exchanges: Solidus Labs

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A Solidus Labs report alleges that token deployers and liquidity providers have engaged in wash trading activities exceeding $2 billion on Ethereum-based decentralized exchanges (DEXs) since the year 2020.

Market surveillance firm Solidus Labs has uncovered a concerning trend, asserting that over the past three years, more than 20,000 cryptocurrency tokens have fallen victim to manipulation through wash trading on decentralized exchanges (DEXs).

In the second segment of its 2023 Crypto Market Manipulation Report, released on September 12, Solidus Labs makes a startling revelation. Among a representative sample of 30,000 Ethereum-based DEX liquidity pools, an astonishing 70% have been identified as participants in wash trading activities since September 2020. These activities collectively account for a staggering $2 billion in cryptocurrency transactions.

Wash trading is a deceptive practice employed in market manipulation. It involves an entity buying and selling the same asset repeatedly, thereby creating a false illusion of heightened market activity.

While wash trades are not exclusive to the cryptocurrency realm and are also prevalent in traditional finance, Solidus Labs argues that manipulators find it considerably easier to execute such schemes within the cryptocurrency market.

The reason behind this ease of manipulation is attributed to the fragmentation of liquidity across a multitude of centralized and decentralized exchanges in the cryptocurrency sphere. This fragmentation results in smaller markets that are more susceptible to manipulation.

Furthermore, a contentious issue looms over the regulation of on-chain wash trading detection and prevention, primarily due to the decentralized and global nature of the cryptocurrency finance industry.

As Asaf Meir, the Founder and CEO of Solidus, aptly puts it, “Market manipulation remains a significant challenge within the crypto industry, especially in an era marked by heightened regulatory scrutiny and increased institutional involvement. The prevalence of wash trading activities uncovered in this report serves as a clear indication of market manipulation, and its eradication is imperative for the continued growth and success of the crypto and DeFi sectors.”

Solidus elucidates that wash traders encompass a diverse spectrum, ranging from token deployers seeking to orchestrate effortless rug pulls to speculators attempting to exploit upcoming token airdrops. Even exchange and marketplace operators have been known to partake, as they engage in wash trading to artificially inflate trading volumes in a bid to attract more investors and users.

In 2022, a study conducted by the National Bureau of Economic Research revealed a startling statistic: more than 70% of unregulated exchange volumes were attributed to wash trades. The study argued that short-term incentives drove these manipulative practices, and the resulting fake transactions significantly skewed the rankings of exchanges on data and statistics websites, such as CoinMarketCap and CoinGecko.

Additionally, it’s important to note that these fraudulent transactions also exert a considerable influence on cryptocurrency prices within these exchanges, albeit only in the short term.

Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Crypto is not a legal tender and is subject to market risks. Readers are advised to seek expert advice and read offer document(s) along with related important literature on the subject carefully before making any kind of investment whatsoever. Crypto market predictions are speculative and any investment made shall be at the sole cost and risk of the readers.