Wash trading is pervasive in DeFi, says Solidus Labs report

Rick Steves

“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, a pioneer in crypto-native trade surveillance and risk monitoring, has released its latest Crypto Market Manipulation Report.

The report sheds light on wash trading, a form of market manipulation, and its pervasive presence within the Decentralized Finance (DeFi) ecosystem.

Wash trading has long been a concern in the crypto industry, and Solidus Labs’ findings underscore its continued existence, prompting a need for prevention and regulatory intervention.

Wash Trading in DeFi: A $2 billion issue

Solidus Labs’ investigation focused on Ethereum-based decentralized exchanges (DEXs) and uncovered startling results. According to the report, crypto token deployers and liquidity providers engaged in wash trading activities worth a minimum of $2 billion since 2020.

The analysis examined approximately 30,000 DEX liquidity pools, revealing that a staggering 67% of these pools had fallen victim to wash trading manipulation. Wash trading constituted 16% of the total trading volume within these manipulated pools. Importantly, this figure is considered a conservative estimate, highlighting the broader issue of wash trading within DEXs.

Asaf Meir, Founder and Chief Executive Officer at Solidus Labs, commented: “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.”

The DeFi challenge and responsibility

The DeFi landscape’s fragmented liquidity across various DEXs creates smaller markets that are more susceptible to price and volume manipulation.

Solidus Labs’ report offers specific examples of wash trading methods employed by malicious actors in the DeFi space. One case highlighted involved coordinated wallets manipulating the “SHIBAFARM” meme token, ultimately profiting over $2 million by deceiving speculators.

While traditional markets have well-established mechanisms for detecting and preventing wash trading, questions remain regarding responsibility in the realm of on-chain wash trading detection and prevention. Regulatory clarity is required as the crypto industry navigates these challenges.

Solidus Labs is actively addressing these concerns by developing solutions to identify and prevent market manipulation in the DeFi sector. Their offerings include Token Sniffer, DEX-Based Insider Trading, and DEX-Based A-A Wash Trading Detection. These tools are gaining traction among crypto exchanges, regulators, and investors, aligning with the industry’s push for greater market integrity and transparency.

IOSCO wants key actors in DeFi to bear responsibility

Last week, IOSCO released nine policy recommendations for consultation, aimed at addressing market integrity and investor protection concerns within the DeFi space.

One crucial aspect highlighted by IOSCO is the misconception surrounding the decentralization of DeFi. Despite the autonomy associated with DeFi protocols and smart contracts, “responsible persons” can be identified. These individuals, whether legal entities or natural persons, are seen as key actors who should bear responsibility for upholding investor protection and market integrity.

The organization aims to finalize the DeFi recommendations by the end of 2023, in line with its Crypto-Asset Roadmap established in July 2022. This effort is intended to work in conjunction with IOSCO’s existing recommendations for Crypto and Digital Assets (CDA).

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