DeFi players slam report that market is littered with $2 billion worth of wash trades – DL News

• Solidus Labs claims DEX liquidity providers have allowed wash trading of at least $2 billion worth of cryptocurrencies.
• Experts counter that the report only cherry-picks data to draw a general conclusion about widespread wash trading.
• The report highlights wash trading of SHIBAFARM tokens.

Over the past three years, decentralized exchanges enabled at least $2 billion worth of cryptocurrency wash trading, says Solidus Labs, a crypto research firm.

Solidus called the finding a “major challenge to the integrity of the DeFi market.”

But industry officials have questioned Solidus' results.

They say the report unfairly conflates questionable pools with mainstream pools and does not provide a clear picture of DeFi trading as a whole.

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Wash trade debate

The debate was triggered by a report that Solidus published last week. Liquidity providers on Ethereum-based decentralized exchanges – or DEXs – have been found to have laundered the prices and volumes of more than 20,000 tokens since 2020.

Solidus said it used 30,000 DEX liquidity pools in its sample and that “wash trading accounted for 13% of the pools’ trading volume.”

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Wash trading is a form of market manipulation in which a company repeatedly buys and sells the same asset to increase its trading volume and mislead the market.

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However, some DeFi experts say Solidus' report cherry-picks the pools examined to draw a general conclusion about widespread wash trading.

“While the study appears to uncover real wash trading in long-tail assets, the results are far from generalizable to DEXs more broadly,” Nagaking, a Curve Finance fellow who studies DeFi market structure, told DL News .

“Wash trading is not a profitable strategy for the vast majority of tokens.”

—Nagaking

Since much of DeFi trading is controlled by experienced players, using an old market trick might not even be worth it.

“Wash trading is not a profitable strategy for the vast majority of tokens, whose DEX volumes tend to be dominated by arbitrage and directional betting,” he said.

Selected data

Other critics expressed concerns about the report's data sampling.

“The sample only includes selected malicious tokens, aka scams,” said Mikko Ohtamaa, CEO of DeFi trading protocol Trading Strategy, in response to Solidus’ report. “It does not represent DEXs or trading pairs as a whole.”

A Solidus representative said the report “clearly states that the research is based on a meaningful sample and not the entire DEX ecosystem.”

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“Our sample did not only contain scam tokens,” Solidus told DL News. “Nearly half of the wash trading volume identified in our research came from liquidity pools of harmless and legitimate tokens.”

But the methodology outlined in the Solidus report calls this claim into question.

The research firm said it only included data on pools where the first liquidity provider provided more than 90% of the two tokens in the pool at any point in the trade.

Liquidity pools

However, scam token liquidity pools are almost always funded by a single major liquidity provider and typically receive little to no liquidity from external sources.

A recent example of a token where its creator provided the majority of the liquidity was BALD on Coinbase's Base chain. It cost investors over $5.2 million after its creator pulled the rug out from under the token.

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Such a setup also excludes the largest and most frequently used liquidity pools, such as Curve Finance's 3pool, where liquidity providers are more evenly distributed. 3pool has facilitated more than $288 billion in transactions since its launch in January 2020.

Additionally, Solidus said it only analyzed liquidity pools if one of the tokens in the pool contained malicious code or if the pool enabled more than two trades for every single trader who used it. This approach also excluded legitimate tokens.

Targeted attacks

Critics say there is a good reason why activity surrounding such tokens should not be lumped in with all DeFi trading. Ohtamaa told DL News that due to the permissionless nature of public blockchains, anyone can easily create tokens and generate volume on DEXs at a very low cost.

This makes the introduction of such tokens a low-risk way for fraudsters to lure victims into targeted attacks, Ohtamaa said. However, this practice does not significantly impact mainstream DeFi trading of established assets.

“They simply clutter data sets that are never seen by real users or merchants,” Ohtamaa said. “It takes more than just deploying a token trading pair and generating some volume to get people to buy into a scam.”

DL News asked Solidus about the limitations of its sampling criteria but did not receive an immediate response.

Real market abuse

However, Solidus highlighted that its data set featured a specific wash trade token – SHIBAFARM – as an example of a scam involving real victims. The SHIBAFARM token is a so-called honeypot – a token that allows traders to buy it, but is coded so that they are never allowed to sell it.

“We have seen real testimonies from people who have been hurt by this market abuse,” Solidus said, linking to a TikTok video from an investor who said he lost eight Ether worth around $30,000 by purchasing SHIBAFARM .

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Although apparent scams are not uncommon, Ohtamaa argued that such activities pale in comparison to legitimate trading.

“We estimate that far less than one percent of real user trading volume on DEXes is associated with fraud,” he said.

“If you exclude spammers and liquidity sniping bot operators,” he added.

Do you have a tip about DeFi? Contact the writer at [email protected].

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