Decentralized exchanges are generally valued for their transparency and lack of custody, which reduces the trust requirements of their operators.
Many decentralized exchanges are involved in a special type of manipulation that increases their trading volume. This was first revealed in the Bitwise report published in March 2019, in which trading patterns on some platforms were analyzed to infer from them Up to 95% of the Bitcoin trading volume reported at the time was essentially counterfeit.
One of Ways to increase the volume is the practice of the “laundry trade”., in which a single unit acts as the creator and recipient of an order and essentially deals with itself. While “laundering” mostly only benefits the stock exchange and inflates the reported statistics, some exchanges have used incentive systems like mining transaction fees to reward users for the laundry trade.
Although self-custody is an important value proposition for DEXs, the fact that it is based on a blockchain guarantees transparency in the operation of exchanges. The entire trade is usually recorded in a public database so that misconduct can be easily identified.
It may come as a surprise then that some DEXs see fairly obvious rinses on their rigs.
Binance DEX and the Travala token
The decentralized exchange initiated by Binance has at least a couple with laundrette fairly easy to spot.
The Travala token (AVA) from the Binance supported project is one of the highest volume pairs for the BNB token from Binance.
A first indication in the laundry trade is the volume diagram. One of the tactics that Bitwise used to detect the wrong volume was the detailed pattern. As a rule, tokens have large volume peaks between periods of low and high volatility, the peaks being clearly recognizable when prices move strongly in a certain direction.
In the AVA / BNB pair, the volume is equally high with low volatility, while this volume tends to decrease rather than increase at price peaks.
AVA / BNB pair diagram on Binance DEX
However, since this is a decentralized exchange, A conclusive proof for the laundry trade can be obtained via the Block Explorer. For example, you can see two accounts that order every minute for about 5 to 30 BNB or about 80 to 550 dollars. Since the orders have exactly the same amounts and are delayed by a maximum of a few seconds, it is very likely that the accounts are owned by the same entity.
These two purses are responsible for the 24-hour volume of approximately 18,000 BNB ($ 316,000).of a total of just under 30,000 BNB (USD 500,000).
When contacting a Binance spokesman told Cointelegraph:
“Binance DEX is a decentralized platform. Binance has no control over the order flow. in the same way that nobody can control the order flow in Uniswap. It is also a transparent network because the connection is evidence. We are with the community to report market manipulations. “
Although the author could be anyone It is unclear why someone would do a laundry trade on one platform without benefiting themselves. Binance did not answer specific questions about possible motivation. It should be noted that other pairs in the DEX do not appear to be affected by the laundry trade.
Loopring often shows the same wallet as the creator and recipient
The laundry trade is even easier to recognize in the zkRollup-based DEX Loopring. The platform appears to allow the same wallet address to act as the creator and recipient of an exchange transaction.
The latest snapshot of their trades, captured by Dune Analytics, shows how Most transactions are carried out by a few purses that exchange different assets with each other, a clear sign of the laundry trade.
DEX loop ring transactions. Source: DuneAnalytics
In an email conversation with Cointelegraph the head of business development at LoopringMatthew Finestone recognized the problem whereas “there is a case of self-trafficking”.
He explained that There are a variety of actors who may be interested in the laundry trade, including the loop ring itself:
“”Indeed, when it comes to us, it’s about getting some liquidity: Simply create an initial volume to start the movement. This can be creating a line chart for a new couple or keeping the activity going so that organic users can feel welcome. When it comes to others, there are a few reasons, but basically to earn rewards! “
Finestone noted that Loopring has plans to cut its own trade, but nobody can stop others:
“Reducing it when it comes to others is indeed censorship. We would impose our will on what is / is not a good deal. This is definitely something we don’t want to do, especially since it is something WE can do. “
Loopring is a Two-stage zkRollups-based exchange, in which transactions are processed out of the chain, but are processed in compressed batches on Ethereum. Finestone said the solution only guarantees self-government, although “censoring transactions is bad business”.
He added that Loopring often hosts trade competitions and liquidity incentives for mining that could encourage others to participate in the laundry trade. He also suggested that Some of the activities can also come from projects that want to increase the liquidity of their tokens.. “In many cases, anecdotally, these are people who get their bots to work and just test their strategies,” he concluded.
DEXs are not immune to the laundry trade, but it is not a direct manipulation
Finestone concluded by considering that the laundry trade on decentralized exchanges is still different:
“DEXs are not impermeable to the laundry trade. Not at all! It’s just that someone (everyone) has to pay for this action. The trade that is set up on Ethereum cannot be faked. They really make the payments. You pay really for the gas. “”
Vice versa, There is no guarantee that laundry trading on central exchanges will pay commissions. If it is the exchange itself that organizes it, it could simply create exchanges for free, he explained.
“In our case and in all DEXs, it was there, it paid off, it just wasn’t the financial intent we could all have wanted,” said Finestone.
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