Detecting and Quantifying Wash Trading on Decentralized Cryptocurrency Exchanges

TL;DR

This paper identifies and quantifies wash trading on decentralized Ethereum exchanges, revealing significant manipulative activity and emphasizing the need for countermeasures in decentralized trading systems.

Contribution

It introduces a method to detect wash trading on decentralized exchanges and provides the first quantitative analysis of such activity on IDEX and EtherDelta.

Findings

Over 30% of tokens are wash traded on both exchanges.

Wash trading volume amounts to approximately 159 million USD.

10% of tokens on EtherDelta are almost exclusively wash traded.

Abstract

Cryptoassets such as cryptocurrencies and tokens are increasingly traded on decentralized exchanges. The advantage for users is that the funds are not in custody of a centralized external entity. However, these exchanges are prone to manipulative behavior. In this paper, we illustrate how wash trading activity can be identified on two of the first popular limit order book-based decentralized exchanges on the Ethereum blockchain, IDEX and EtherDelta. We identify a lower bound of accounts and trading structures that meet the legal definitions of wash trading, discovering that they are responsible for a wash trading volume in equivalent of 159 million U.S. Dollars. While self-trades and two-account structures are predominant, complex forms also occur. We quantify these activities, finding that on both exchanges, more than 30\% of all traded tokens have been subject to wash trading activity. On EtherDelta, 10% of the tokens have almost exclusively been wash traded. All data is made available for future research. Our findings underpin the need for countermeasures that are applicable in decentralized systems.