According to a recent report by Solidus Labs, decentralized crypto exchanges have become a breeding ground for wash trading, a form of market manipulation where fraudsters trade with themselves. The report reveals that at least $2 billion worth of cryptocurrency on ethereum-based decentralized exchanges have been wash traded since September 2020, affecting around 20,000 tokens.
Wash trading artificially boosts the price and volume of a crypto token, creating the illusion of liquidity and attracting other investors. The allure of decentralized exchanges for fraudsters lies in the lack of a middleman and lower transaction fees, which make it easier to attract investors to the tokens they are trading.
This trend contradicts the general perception of decentralized finance (DeFi) exchanges as a safer alternative to centralized exchanges like FTX and Binance, which are sometimes seen as less transparent. DeFi platforms allow users to trade directly with each other, eliminating the need to hand tokens over to an exchange as an intermediary. In fact, inflows into DeFi exchanges surged in late 2022 and early 2023, following FTX's collapse.
Wash trading has long been a concern in the crypto industry, with a previous working paper from the National Bureau of Economic Research revealing that it accounted for nearly all transactions on non-compliant crypto exchanges. Mark Cuban, a well-known investor and crypto enthusiast, has warned that wash trading could lead to the next "implosion" in the crypto space, following the FTX saga.
Overall, the report highlights the prevalence of wash trading on decentralized crypto exchanges and raises concerns about the integrity of these platforms. While DeFi exchanges are often seen as a safer option, it is crucial for investors to remain vigilant and aware of the risks associated with market manipulation and fraudulent practices.