The recent study by Chainalysis has shed light on the decentralized finance (DeFi) sector’s trading activities, uncovering practices such as pump-and-dump schemes and wash trading. It highlights the manipulation of token prices by certain actors who drive up demand through misinformation before selling their own stakes for profit.
Launch and Liquidity of Crypto Tokens
In 2023, the Ethereum network saw the creation of over 370,000 new tokens, with roughly half of those making their way to decentralized exchanges. Chainalysis’ findings indicate that a minuscule fraction of these tokens garner significant liquidity post-launch, with only 1.4% crossing the $300 mark in decentralized exchange liquidity and a mere 5.7% maintaining it.
Limited Liquidity and Profit Extraction
The analysis also revealed that many of these assets display minimal liquidity, and in some cases, single transactions have withdrawn substantial amounts of liquidity from the market. This pattern, however, doesn’t necessarily implicate the involved assets in fraudulent schemes but rather serves as a method to spot potential irregularities in trading activities.
Despite these challenges, certain participants have managed to profit significantly from launching crypto assets. In 2023, a group of these actors gained approximately $241.6 million, with some repeatedly introducing multiple tokens to the market for considerable gain.
Jason Somensatto of Chainalysis has suggested that implementing a regulatory framework could mitigate issues like insider trading by establishing clear rules for trading platforms and authorizing a market regulator to enforce them. He points out the necessity for comprehensive data analysis across multiple platforms due to the decentralized nature of cryptocurrency trading, which contrasts with the traditional financial system’s reliance on single-exchange data.