To take profit, 0x9e8 simply had to withdraw two-sided liquidity from the pool, which now consisted of much more ETH (worth about $3,700 at the time) and less SHIBAFARM (effectively worthless) than before. In traditional finance, self-trade prevention functionality (STPF) is built into modern exchanges. Two nights later, SHIBAFARM’s deployer created a new token, SHIBASWAP, and repeated this process from scratch. By tracing token flows between wallets providing liquidity and trading in the same pool, exchanges and regulators can identify suspicious clusters of wallets for further investigation. Applied to DEXs, such functionality could prevent the millions of A-A-type wash trades we detected. As we’ve demonstrated in this report, DEX-based wash trading is detectable – and in many cases even preventable. However, there is no question that fairer markets are essential for sustainable growth. Since 2021, SHIBAFARM’s deployer has made and manipulated the prices of more than 50 scam tokens. Multi-party wash trading is similarly addressable. In DeFi, a regulatory question remains regarding who is responsible for wash trading prevention and detection.

Demo Trading Crypto

In mid-May of 2021, a token named SHIBAFARM came online, and its price began a continuous, precipitous climb. SHIBAFARM’s deployer used two technical tricks to create the impression that SHIBAFARM was SHIB’s second coming. The first was a honeypot: a type of rug pull in which a token’s smart contract is programmed to block the token’s buyers from subsequently selling. It had no website, roadmap, or public offering to credit for the rally; instead, its creator relied on investor FOMO about a similar memecoin’s rapid rise. The week before, Shiba Inu (SHIB) had skyrocketed 2,500% almost overnight.

What is wash trading, and why does it happen in crypto? Wash trading is a form of market manipulation in which one entity simultaneously buys and sells the same asset, creating a false impression of market activity despite the trade reflecting no change in beneficial ownership. While centralized exchanges and market makers typically have the option to wash trade at a no cost or a lower cost on centralized venues where orders are matched and executed off-chain, token deployers – especially scam token deployers – have some of the strongest incentives to wash trade on decentralized venues that execute trades on-chain, where transaction fees are higher. In crypto, liquidity is fragmented across a variety of centralized and decentralized venues, resulting in smaller markets that are easier to manipulate.

This meant that SHIBAFARM faced no sell pressure – no matter how hard investors tried. These wallets would then execute 5-20 ETH buys of SHIBAFARM against the liquidity 0x9e8 provided – resulting in no change in beneficial ownership – and transfer the remainder to another fresh wallet. After deploying SHIBAFARM, its creator (address 0x9e8, bottom-center in the below chart) began transferring large sums of 80-400 Ether (ETH) to a set of newly created wallets. The second was a “chained” multi-party wash trading strategy.

How Code Breakers Work

This wallet would, like the one before it, swap some ETH for SHIBAFARM and then pass the remaining ETH on to a new address. 40% of SHIBAFARM’s volume. 0x9e8 repeated this process more than 30 times to manufacture rapid, organic-seeming growth in SHIBAFARM’s volume and price. The result: in the span of two hours on May 15th, 2021, 0x9e8 made off with profits of approximately $2 million – all without “selling” SHIBAFARM once. As the sole liquidity provider in the pool that paired their scam token with ETH, 0x9e8 was the main counterparty in every one of the other traders’ ETH-to-SHIBAFARM swaps. Using these two deceptive techniques, 0x9e8 engineered a hockey-stick price chart for SHIBAFARM.

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