Price manipulation schemes of new crypto-tokens in decentralized exchanges

TL;DR

This paper investigates the financial risks and market manipulation tactics in new crypto-tokens on decentralized exchanges, revealing prevalent honeypots, rug pulls, and sandwich attacks that threaten investor security.

Contribution

It provides a comprehensive analysis of market manipulation schemes, liquidity issues, and the fundamental dynamics of token price evolution in decentralized markets.

Findings

High prevalence of honeypots and liquidity traps

Identification of common manipulation patterns like rug pulls and sandwich attacks

Insights into the profitability of low-liquidity pools

Abstract

Blockchain technology has revolutionized financial markets by enabling decentralized exchanges (DEXs) that operate without intermediaries. Uniswap V2, a leading DEX, facilitates the rapid creation and trading of new tokens, which offer high return potential but exposing investors to significant risks. In this work, we analyze the financial impact of newly created tokens, assessing their market dynamics, profitability and liquidity manipulations. Our findings reveal that a significant portion of market liquidity is trapped in honeypots, reducing market efficiency and misleading investors. Applying a simple buy-and-hold strategy, we are able to uncover some major risks associated with investing in newly created tokens, including the widespread presence of rug pulls and sandwich attacks. We extract the optimal sandwich amount, revealing that their proliferation in new tokens stems from higher profitability in low-liquidity pools. Furthermore, we analyze the fundamental differences between token price evolution in swap time and physical time. Using clustering techniques, we highlight these differences and identify typical patterns of honeypot and sellable tokens. Our study provides insights into the risks and financial dynamics of decentralized markets and their challenges for investors.