Blogs from September, 2023


Wash Trading

The Underbelly of Decentralized Finance: Wash Trading, White Collar Crime, and the Path to Fairer Markets

By R Tamara de Silva

In the rapidly evolving world of financial markets, decentralized finance (DeFi) stands at its frontier. But as with any burgeoning market, there is the possibility for fraud. The shadowy specter of market manipulation, in the form of "wash trading," looms large. As a law firm specializing in white-collar defense and financial markets, we dive deep into these challenges.

First some definitions. Wash trading occurs when an entity or individual makes fictitutious trades that have the appearance of being real trades but the entity of individual is actually both the buyer and seller of the trade. It trades with itself to falsely inflate prices, create a semblance of liquidity, and attract attention from other investors. Wash trading is illegal and a form of market manipulation. and can mislead investors into purchasing tokens at inflated prices. Crypto exchanges themselves can engage in wash trading to deceitfully elevate trading volumes, giving an impression of higher activity or liquidity than what truly exists. This can be especially enticing to investors scouting for an exchange, especially when they're making comparisons.

Decentralized finance (DeFi) is a new paradigm that allows for the functions of trading, lending, and borrowing activities of traditional finance to occur on blockchain networks, eliminating the necessity of intermediaries. Contrary to the often unclear operations of centralized cryptocurrency exchanges, DeFi boasts transparency. This characteristic embodies one of the primary visions of blockchain technology, and this article delves into its potential to revolutionize Forex trading.

Since the fall of FTX, the volume of decentralized crypto exchanges (DEXs) has seen a remarkable surge. The allure of decentralized exchanges lies in their ability to negate the requirement for a middleman, thereby enabling users to retain control of their digital assets and cryptocurrencies. By holding onto their private keys, DEX users can sidestep issues commonly associated with centralized crypto exchanges, such as the mishandling or mixing of user assets with those of the central exchange. The risk of losing cryptocurrency, encapsulated in the saying "not your keys, not your crypto," becomes a non-issue.

What DeFi trading still lacks is any enforcement and regulation mechanism as robust as the highly regulated and liquid regulated trading exchanges found in the securities and particularly the futures markets.

Wash Trading in DeFi: By The Numbers

A recently released report by SolidusΒ Labs Trade Surveillance paints a startling picture of wash trading in Ethereum-based decentralized exchanges (DEXs) that suggests rampant market manipulation in the form of wash trading.

According to the report, since September 2020:

- $2 billion worth of cryptocurrency has been wash-traded by liquidity providers (LPs) on DEXs, influencing the prices and volumes of over 20,000 tokens.

- A staggering 67% of nearly 30,000 DEX liquidity pools according to the study have experienced wash trades, making up 13% of these pools' total trading volumes.

Given that the study represents only a tiny fraction of all pools, the real magnitude of DEX-based wash trading since September 2020 could be vastly larger.

Understanding Wash Trading in Cryptocurrency

Keep in mind that wash trading is a deception in which an individual or entity buys and sells the same asset, creating a false illusion of market activity, without any genuine shift in asset ownership. In the cryptocurrency landscape, with its fragmented and smaller markets, there are few, if any, checks against wash trading.

Various players in wash trading to engage:

  1. Exchange and Marketplace Operators: Amplify reported trading volumes to draw potential investors and users.
  2. Crypto Market Makers: Satisfy order-to-trade ratio stipulations in contracts or manipulate token prices.
  3. Individual Speculators: Rank higher on leaderboards to earn rewards.
  4. Token Deployers: Entice traders with scams, achieve centralized exchange listings, or paint a rosy picture of their project's health.

Many actors, especially deceptive token deployers, find DEXs attractive for their wash trading ventures, given that DEX liquidity pools often act as a token's initial listing venue.

Types of DEX-based Wash Trading

  1. A-A Wash Trading: A single address dominates both sides of a token swap, artificially adjusting the token's market metrics without real ownership change. Solidus states that there have been $960 million in such trades since September 2020.
  1. Multi-Party Wash Trading: Coordinated trading across different addresses under one entity's control. This camouflages a token's apparent popularity. Approximately $1.1 billion of such transactions have been spotted since September 2020.

Moving Towards Fairer Markets: Wash Trading Prevention and Detection

Navigating the regulatory landscape of DeFi presents challenges. While the responsibility for wash trading prevention and detection might be debatable, the importance of just markets for sustainable growth isn't.

One possible solution taken from the regulated and mature world of traditional trading exchanges would be to institute Self-Trade Prevention Functionality (STPF). As the Solidus Trade Survey suggests, integrating STPF into DEXs may thwart millions of detectable A-A-type wash trades.

Another solution suggested by the Solidus report would be to monitor token flows between intertwined wallets in the same liquidity pool. Suspicious wallet clusters could be identified for deeper scrutiny-according to Solidus.


DeFi's exciting promises are shadowed by market manipulation for the time being. In time, as the industry matures, there will be solutions. In the interim, stakeholders must stay vigilant and understand the risks of trading in DEXs.

Call us if you are ever charged with an instance of market manipulation like wash trading by a trading exchange, regulation or investigator. It is important that you have experienced and qualified counsel to represent you and that this counsel understands how market manipulation is investigated and prosecuted. The De Silva Law Offices has experience handling market manipulation cases.

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