While existing academic research has been focused on manipulations in centralized exchanges, one new report delves into DEXs despite the complexities
Crypto market manipulation is a growing concern worldwide due to the industry’s evolving complexity, pseudonymity and decentralization. This makes it difficult for the authorities and for industry participants to detect and prevent fraudulent activities.
On 29 Jan 2025, one blockchain analysis firm released a report focusing on certain novel methods to detect “wash trading” and “pump-and-dump” schemes within decentralized finance (DeFi).
Unlike centralized exchanges, DeFi provides transparent on-chain data, making it possible to detect suspicious trading behavior patterns. However, identifying intent remains challenging, requiring a combination of on-chain and off-chain analysis.
The report on crypto crime provides a breakdown of wash trading and pump-and-dump schemes, and explores how the bad actors involved have exploited decentralized exchanges (DEXs) and automated market maker (AMM) pools. Additionally, the researchers have provided details on the role of volume-boosting bot services, such as Volume.li, in generating US$246.2m in trading volume to date.
Within the limits of the researchers’ methodologies, and under disclaimers regarding the accuracy of their findings, the report offers the following conclusions about regulatory and enforcement challenges:
- Supported by a case study on Volume.li (a bot-based wash trading service), the finding is that it is easy to generate fake trading volume.
- SEC and IRS investigations into wash trading schemes have revealed international collusion among market makers.
- Bad actors and fraudsters have been increasingly using multiple addresses and automated tools to evade detection.
- Suspected wash trading on select blockchains may account for up to US$2.57bn in trading volume.
- To prevent and detect crypto market manipulation, it is recommended that stakeholders use a robust and coordinated approach—one that fully harnesses the power of on-chain data and analytics.
The report by Chainalysis asserts that, without stronger oversight and smarter detection tools, continual, unpredictable illicit market manipulation activities could undermine trust in DeFi, hindering its potential to transform global markets.
