Most cryptocurrency enthusiasts have very high expectations for decentralized exchanges. DEXs embrace the decentralized aspect of cryptocurrencies and remove the need for custodians. Even so, these exchanges cannot solve all the world’s problems, as manipulation of trading and volume remains a pressing issue.
Manipulating Decentralized Exchange Trading Volume
A very intriguing Medium post surfaced over the weekend. It explained how easy it is to create new ERC20 tokens using a smart contract. Although that is not new information by any means, it is evident this can be done for many different purposes. One of the options is to create fake trading volume for a new token which serves virtually no purpose.
After all, it’s easy to get such tokens listed on decentralized exchanges. Unlike their centralized counterparts, ERC20 tokens can be traded in a decentralized manner without undergoing an official listing process. This in turn generates trading volume for newly created tokens which do not matter.
To make matters worse, anyone creating such an ERC20 token can immediately fake its trading volume. The process of adding such a token to an exchange is relatively easy, as all it takes is sending funds to an exchange contract. This can either be an existing decentralized exchange or a newly-written contract which is promoted heavily on social media.
The creator of the token can then go on to create a fake buy order and fill it himself. He is responsible for the maker and taker-based trading of the new token, filling his own order in the process. This is not a novel scheme by any means, but it is evident that smart contracts and decentralized exchanges are particularly prone to this type of activity.
By repeating this process multiple times, one person can manufacture a high trading volume for their newly created coin. This will undoubtedly attract the attention of others along the way, as observers will see a relatively new currency which is quickly rising in value with minimal volume. Once people buy into this token, the creator can promptly dump his supply on the open market.
Although finding out about these fake coins is not difficult, there are still plenty of users who fall for these cheap tactics. It is uncanny how people tend to jump on any opportunity in the hopes of getting rich quick. In most cases, the coin creator will score a bit of money before moving on, creating a brand-new token, and repeating the process. Decentralized trading solutions may need to find ways to bypass these problems in their code, although building such mechanisms will not be easy.