In a recent market manipulation report by Solidus Labs, a prominent player in crypto-native trade surveillance and risk monitoring, the extent of wash trading on Ethereum-based decentralized exchanges (DEXs) has been brought to light. The report reveals that wash trading, which involves the execution of transparent or concealed self-trades to artificially manipulate the prices or volumes of cryptocurrencies, has been rampant on these platforms since 2020. Shockingly, the analysis conducted by Solidus Labs indicates that approximately $2 billion worth of cryptocurrency has been subject to wash trading.
Solidus Labs examined approximately 30,000 DEX liquidity pools and found that an astonishing 67% of them had been manipulated through wash trading. In these manipulated pools, wash trading accounted for a staggering 16% of the total trading volume. This revelation underscores the severity of the issue and the urgent need for preventive measures to safeguard the integrity of the crypto industry.
The dispersion of liquidity across various DEXs within the DeFi space creates smaller markets that are more susceptible to price and volume manipulation. Solidus Labs’ report highlights this vulnerability and emphasizes the importance of addressing manipulative practices to promote the healthy growth of the crypto and DeFi sectors. The report even presents a specific instance where Solidus Labs identified a network of connected wallets engaged in wash trading a meme token called “SHIBAFARM,” ultimately profiting over $2 million. Such cases demonstrate the dire need for action against market manipulation.
Asaf Meir, the Founder and Chief Executive of Solidus Labs, acknowledges that market manipulation remains a significant challenge within the crypto industry. This concern is amplified by the current regulatory scrutiny and growing institutional adoption of cryptocurrencies. Meir asserts that the wash trading activity uncovered by Solidus Labs unequivocally indicates market manipulation, which must be addressed for sustained growth in the crypto and DeFi sectors.
Wash trading is an issue that has long been addressed in traditional markets through trade surveillance and self-trade prevention mechanisms. However, within the blockchain and DeFi realms, questions arise regarding the responsibility for on-chain detection and prevention of wash trading. Solidus Labs, recognizing the need for risk mitigation within DeFi, is actively developing solutions such as Token Sniffer, DEX-Based Insider Trading, and DEX-based A-A Wash Trading Detection.
In a bid to enhance transaction monitoring, EDX Markets, a crypto exchange supported by major Wall Street entities including Citadel, Fidelity, and Schwab, recently joined forces with Solidus Labs. The collaboration aims to strengthen transactional risk management on the EDX platform by implementing comprehensive solutions aligned with institutional best practices and high compliance standards in the cryptocurrency space.
The alarming findings of Solidus Labs’ market manipulation report underscore the urgent need for action in combating wash trading and other forms of market manipulation in the crypto industry. As regulatory questions persist, industry stakeholders must come together to develop robust mechanisms for detecting and preventing wash trading on decentralized exchanges. By doing so, the industry can build trust, protect investors, and ensure the long-term viability of cryptocurrencies and DeFi.