The crypto market finds itself in the crosshairs of market surveillance firm Solidus Labs. Over the past three years, more than 20,000 crypto tokens have allegedly been subject to manipulation through wash trading on decentralized exchanges (DEX). Solidus Labs insinuates that up to $2 billion worth of crypto has been wash traded in a sample of 30,000 Ethereum-based liquidity pools since September 2020.
For those unfamiliar, wash trading occurs when an entity buys and sells the same asset with the goal of creating a false impression of bustling market activity. Though this practice persists in traditional finance, crypto arguably offers easier means of manipulation.
In the cryptosphere, liquidity spreads across diverse centralized and decentralized exchanges, which arguably results in smaller markets; hence, an environment more susceptible to manipulation. Questions of regulatory jurisdiction over wash trading detection and prevention complicate matters further, especially considering the borderless nature of decentralized finance.
According to Solidus founder and CEO Asaf Meir, their findings of wash trading activities sound an alarm of market manipulation. He highlights the need for such practices to cease for the flourishing of crypto and DeFi.
Solidus points out that wash traders vary, ranging from token deployers seeking easy rug pulls to speculators looking to play an upcoming token airdrop. Exchange and marketplace operators reporting higher trading volumes in lure of investors and users can also fall into this category. The National Bureau of Economic Research corroborated these findings in 2022, suggesting that over 70% of unregulated exchange volumes involved wash trades, an unsettling backdrop for aspiring crypto enthusiasts.
Fake transactions also influence crypto prices within exchanges in the short term. Attracting investors with these inflated prices creates a shaky foundation for the future of the cryptosphere. Therefore, comprehensive and effective regulatory oversight might be what’s needed to bring stability and credibility to an industry that increasingly continues to disrupt traditional financial markets.
While there are substantial short-term incentives for wash trading, they often affect the rankings of the exchanges on data and statistics websites such as CoinMarketCap and CoinGecko. This entices new investors with distorted metrics, another aspect of the issue that could benefit from regulation.
Although the crypto market has indeed been a beacon of innovation and potential wealth generation, Solidus Labs’ report underscores that the market’s burgeoning appeal isn’t without its significant challenges. Crypto wash trading is indeed one of the hurdles that need to be surpassed to build trust among the masses.
Source: Cointelegraph
