The Prevalence of Pump and Dump Schemes in the Crypto World
One of the challenges in the crypto world is the presence of pump and dump schemes. In a recent report by Chainalysis, it was revealed that 54% of ERC-20 tokens listed on decentralized exchanges (DEX) showed suggestive patterns of these schemes. However, these tokens only accounted for 1.3% of the total trading volume on DEXs.
The Rise of Pump and Dump Schemes in DeFi
Pump and dump schemes involve inflating the price of a token before selling it for profit, leaving unsuspecting investors at a loss. To combat these practices, Chainalysis researchers analyzed data from the decentralized finance (DeFi) ecosystem of the Ethereum network.
Between January and December 2023, over 370,000 tokens were launched on Ethereum, with approximately 168,600 available on at least one DEX. Researchers established three criteria, known as “Criteria A,” to identify potential pump and dump candidates.
Out of all the tokens launched, 24.4% met the criteria, representing 53.6% of those listed on DEXs. However, these tokens only contributed to 1.3% of the total trading volume on Ethereum DEXs in 2023.
Profit Calculation and Case Study
The study also estimated the profits made by actors who launched tokens meeting the criteria. Using a formula that considers fund withdrawals and deposits from DEX pools, as well as trading fees, researchers estimated that these actors collectively made around $241.6 million in profit in 2023.
However, the average profit per token meeting the criteria was only $2,672, indicating limited success in these pump and dump activities. A case study highlighted an address that launched 81 tokens meeting the criteria and generated an estimated profit of $830,000.
Hot Take: The Impact of Pump and Dump Schemes in DeFi
The analysis of ERC-20 tokens on DEXs raises questions about the prevalence and impact of pump and dump schemes in the decentralized finance space. While a significant number of tokens exhibit suspicious patterns, their overall contribution to trading volume remains minimal. It is crucial for regulatory authorities, market operators, and researchers to use chain data to identify and investigate potential market manipulations, promoting transparency and integrity in the cryptocurrency space.
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