United States: Academics Detect Manipulation On ‘Dexes' As Cryptocurrency Trading Expands

Last Updated: May 6 2019
Article by Joanna F. Wasick

A recent academic paper by researchers at Cornell Tech and other academic institutions describes rampant trading manipulation on decentralized cryptocurrency exchanges (DEXes). While the vast majority of cryptocurrency trading volume occurs over centralized exchanges (which custody customer assets and settle trades), DEXes allow for more direct trading, and their use is expected to grow. This paper, however, reports on new high-frequency trading firms that deploy autonomous, algorithmic trading programs that anticipate and take advantage of ordinary users' trading patterns, allowing for front-running (i.e., seeing orders ahead of others and placing their own trades first), aggressive latency optimization and other market manipulation techniques. The paper also found bots engaging in priority "gas" auctions , competitively bidding up transaction fees in order to get priority orders (early block position and execution) for their transactions. A contributor to the paper stated at a blockchain conference last week that these findings should incentivize those in the blockchain and exchange communities to create new exchange designs to combat the problem.

Despite vulnerabilities, cryptocurrency trading continues to expand. Coinbase announced that it will increase crypto-to-crypto conversions and trading services to 11 more countries, which will give the company a presence in 53 countries across four continents. In addition, micro, small and medium-sized companies ill now be able to make bitcoin and bitcoin cash payments to a major U.K. business travel management services company, thanks to its partnership with BitPay, a global cryptocurrency payment processor. And one of Japan's largest e-commerce companies recently announced that it will accept account registration for its new cryptocurrency exchange, expanding cryptocurrency-based payments in the Asian online retail market.

Volume over exchanges is up too. eToro, a multi-asset trading platform, has unveiled a regulated cryptocurrency exchange geared toward "professional traders." The platform offers 37 trading pairs, with the ability to convert six cryptocurrencies into fiat, including the dollar, Euro and Swiss franc. According to a popular blockchain news source, estimated profits for Binance, another major cryptocurrency exchange, totaled $78 million in Q1 – up 66% from the previous quarter. Even endowment funds, with a reputation among some as more conservative investors, are entering the space. A 2018 Q4 survey of 150 endowments found that 94% had invested in cryptocurrency-related initiatives in the past 12 months. The endowments, most of which were U.S.-based, reported that the most attractive crypto-assets were those with robust regulation, sufficient capital flow and liquidity, and account security.

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