A recent analysis by market monitoring business Solidus Labs shed light on the prevalence of wash trading in the crypto industry, finding that over 20,000 crypto tokens had been manipulated through decentralized exchange (DEX) wash trading in the last three years.
On September 12, Solidus Labs published their 2023 Crypto Market Manipulation Report, which included some alarming data. A sample of 30,000 Ethereum-based DEX liquidity pools was examined, and it was discovered that roughly 70% of them have carried out wash trades since September 2020, totaling about $2 billion in cryptocurrencies.
Wash trading is a dishonest form of market manipulation where a party simultaneously buys and sells the same item to give the impression that the market is active and liquid. While wash trading does exist in traditional finance, the paper emphasizes that cryptocurrency markets are particularly susceptible to it since their liquidity is split across numerous centralized and decentralized exchanges, creating smaller, more easily manipulated markets.
The ongoing regulatory discussion regarding who is responsible for identifying and blocking on-chain wash trade represents one of the main obstacles to solving this problem. Decentralized finance (DeFi), which has no geographical boundaries, further confuses things and makes it unclear who should be responsible for monitoring.
Asaf Meir, the founder, and CEO of Solidus Labs, emphasized the need to prevent market manipulation in the cryptocurrency sector, particularly in light of increased regulatory scrutiny and expanding institutional usage. “The wash trading activity we have unearthed here is a clear sign of market manipulation,” he said, “and it must be prevented for crypto and DeFi to flourish.”
The paper also identifies a variety of actors involved in wash trading, including token deployers looking for rapid profits, speculators trying to take advantage of future token airdrops, exchange, and marketplace operators boosting trade volumes to draw in users and investors, and token airdrop exploiters.
According to a 2022 study by the National Bureau of Economic Research, wash trades accounted for more than 70% of unregulated exchange volumes in the cryptocurrency sector. On data and analytics websites like CoinMarketCap and CoinGecko, these dishonest practices frequently inflate exchange rankings, and they may also have a momentary impact on the pricing of cryptocurrencies on these exchanges.
The frequency of wash trading emphasizes the necessity for ongoing watchfulness, regulatory frameworks, and market surveillance to guarantee the honesty and transparency of the cryptocurrency market, particularly as it develops and matures.