According to Cointelegraph: Pump-and-dump schemes, once the preserve of traditional financial markets, have pervaded the decentralized finance (DeFi) space, causing reputational damage due to rampant wash trading and other manipulative practices.
Such schemes typically involve an individual or group exploiting hype and fear of missing out to drive investors to purchase tokens. The instigators then covertly sell off their own holdings at higher prices. A recent study by Chainalysis identified over 90,000 Ethereum tokens exhibiting patterns of market manipulation, leading to a collective profit of approximately $241.6 million in 2023.
These figures demonstrate the persistent chaos and lack of regulation that hinders the maturing of the cryptocurrency space, despite its growing resemblance to traditional finance. These practices become even more alarming in light of the increasing number of cryptocurrencies launched, which currently stands at over two million, many of which have been abandoned.
In the DeFi world, insider trading often occurs when unethical team members involved in token deployment become initial buyers. This is especially common for newly minted memecoins. Implementing an independent and transparent third-party detector could be a potential solution to combating fraudulent activity and upholding industry credibility.
While the introduction of regulations like the European Union’s Markets in Crypto-Assets Regulation can help diminish manipulation and prevent fraud, grassroots action is also needed. Cultivating a discerning ethos that encourages investors to do diligent research, remain skeptical, and refrain from impulsive trading motivated by hype can empower individual investors and help foster a safer DeFi ecosystem.