A 2019 blockchain report by Bitwise concluded that most of the reported crypto trading volumes by centralized exchanges were fake. This was after analyzing data and trading patterns across different crypto exchanges and finding that the true market value of a major company’s bitcoin traded was only $273.A rather big difference compared to the daily volumes reported was usually hitting an ostensible $6 billion.
While this report had only been limited to centralized exchanges, analysts found out that decentralized exchanges were as well not immune to volume inflation. Whereas the latter are widely loved for their openness, lack of a central authority and lack of custody; all features that reduce the need for trust in their operations; instances of manipulation are also possible.
Fake Volume Manipulation through Wash Trading
Wash trading is one of the methods by which exchanges inflate their volumes. This is an instance where an individual trader acts both as the maker and taker of a trade order (simply trading him / herself). The method is popular among exchanges attempting to manipulate and inflate their reported data. Nonetheless, several exchanges have been noted for implementing reward schemes for wash trading such transaction fee mining incentives.
Self-custody services of decentralized exchanges remain one of their big winning factors. This is because it ensures transparency in the operation of the exchange. Usually, with the self custody ledger, all transactions are recorded on a public database. Hence, making it easier to detect misbehaviors as they take place across the exchange. It is therefore impossible that Decentralized exchanges have not noticed instances of wash trading on their platforms.
Binance DEX Wash Trading
For instance, wash trading has been taking place in DEXs such as Loopring and Binance DEX. Specifically the token Travala (AVA), a project backed by Binance is one of the tokens posting record volumes with Binance’s BNB pair. What signals wash trading on this pair, is its volume chart.
A normal volume curve can have astronomical volumes during high or low volatility periods. Peaks will appear only at times the market prices are moving in a specific direction. It is typically the metric that Bitwise uses to detect fake volume. In this pair therefore, the chart shows a uniform high even though the market is facing low volatility and during spikes, the volume plummets instead of surging.
Even while there are instances of wash trading on these platforms; it is not clear if the perpetrators will reap any benefits from the action. A Binance spokesman for instance denounced having a hand in wash trading and stressed exchange admins neither had the ability to control order flow on the platform.