Decentralized cryptocurrency exchanges are awash in fake trades, research report says
- At least $2 billion on decentralized crypto exchanges has been wash traded since 2020, according to a new report.
- Wash trading is a form of market manipulation where a fraudster is trading with themselves.
- The trend runs contrary to the general view of DeFi exchanges, which are regarded as safer than centralized exchanges.
Decentralized crypto exchanges are a hotbed for a certain type of fraud known as wash trading, according to a new report from Solidus Labs.
The blockchain research firm found that at least $2 billion worth of cryptocurrency on ethereum-based decentralized exchanges have been wash traded since September 2020. The fraudulent practice has manipulated the price and volume of about 20,000 tokens on DeFi exchanges, the firm said.
Wash trading is a form of market manipulation where fraudulent parties are essentially trading when themselves to artificially boost the price of a crypto token and give the illusion of liquidity, which piques the interest of other crypto investors.
Fraudsters have especially high incentive to wash trade on decentralized crypto exchanges, where crypto trades are made with no middleman, the report said. That’s because transaction fees are often lower on DeFi exchanges, and fraudsters are aiming to attract as many investors to the tokens they’re trading as possible.
“A token deployer’s ability to either get their token listed on a centralized exchange or rug-pull their investors for profit depends upon their skill in attracting speculators to the liquidity pool on which their token is traded. We find that many token deployers will resort to [decentralized exchange] wash trading to do so,” the report said.
The trends runs contrary to the general perception of DeFi exchanges, which are seen by some investors as a safer alternative compared to centralized exchanges like FTX and Binance, which are sometimes viewed as less transparent. Decentralized platforms, it is argued, benefit from users trading directly with one another rather than handing tokens over to the exchange as a middleman. Inflows into DeFi exchanges surged in late 2022 through early 2023, in the months following FTX’s collapse, according to data compiled by The Block.
A working paper from the National Bureau of Economic Research previously found that wash trades accounted for nearly all of transactions made on non-compliant crypto exchanges, and crypto investors have sounded the alarms on wash trading as a major form of fraud in the industry. The practice could be responsible for the next “implosion” to hit the crypto space since the FTX saga, according to “Shark Tank” investor and longtime crypto bull Mark Cuban.