A new report from Solidus Labs found that wash trading is rampant on decentralised crypto exchanges. Wash trading is a type of fraud where a trader buys and sells the same asset to themselves in order to artificially inflate the price or volume of the asset.
The blockchain research company dicovered that since September 2020, wash trading has occurred involving at least $2 billion worth of bitcoin that was transacted on ethereum-based decentralised exchanges. According to the company, the fraudulent practice influenced the price as well as the volume of about 20,000 tokens that were traded on DeFi exchanges.
In a form of market manipulation known as “wash trading,” dishonest parties simply trade with one another in order to artificially raise the price of a cryptocurrency token and create the appearance of liquidity, which attracts the attention of other cryptocurrency investors. The goal of wash trading is to attract the attention of other crypto investors.
According to the paper, dishonest traders have a particularly strong incentive to engage in “wash trading” on decentralised cryptocurrency exchanges because transactions on these platforms involve no intermediaries. This is due to the fact that transaction fees on DeFi exchanges are typically cheaper than those on traditional exchanges, and fraudsters want to attract the maximum number of investors to the tokens they are trading.
Whether a token deployer can get their token listed on a centralized exchange or rug-pull their investors for profit depends on how well they can attract speculators to the liquidity pool where their token is traded. One option is to get their token listed on a decentralised market. The other option is to make a profit by rug-pulling their investors. According to what was stated in the research, “We find that many token deployers will resort to [decentralised exchange] wash trading in order to do so.”