Like in the financial markets, various forms of market manipulation exist in crypto. Hence, intending and professional crypto traders must understand crypto market manipulation to remain successful. Lots of questions often come to mind as decentralized exchanges grow in popularity. How are DEXs better if order manipulation is possible on a decentralized exchange? Read on to find out.
What is Manipulation on Crypto Exchanges?
Centralized exchanges use order books systems to execute transactions by matching buy and sell orders at the best price. Some centralized exchanges have manipulated the market by shutting traders out of positions in the past. A few other exchanges have used data provided by users to their advantage.
Some centralized digital asset exchanges have been guilty of insider trading, where a token was listed first on the exchange. Pre-informed insiders from these exchanges often wait for the highest point during the early stages to dump tokens on retailers.
Decentralized exchanges are harder to manipulate, but this doesn’t mean that hackers don’t exploit DEXs. Scam tokens are one of the most common manipulation techniques malicious actors can unleash, even on the best DEX.
A hacker creates a token with no value and places a bid for the same token at the desired price. They then pay initial transaction fees to create buying pressure and boost the trading volume of that token. When unsuspecting users notice the traffic, they assume the token is valuable and start buying it. Their buy orders give the malicious creator a market to sell their tokens.
The token price quickly collapses after the sale leaving investors with nothing. Some developers also create honeypots, a token in a buy-only contract. Users can only buy these tokens, creating a buy pressure that pushes the price upwards significantly. However, as soon as they buy, their funds are gone, and only the developer can initiate a sell order.
Possible Manipulations on A Decentralized Exchange
Smart Contract Attacks
Smart contract attacks are attacks on a blockchain network that exploit weaknesses in the underlying code of a smart contract. These attacks can steal funds, manipulate transactions, crash a network, or disrupt a smart contract service. In some cases, attackers may even be able to take control of the entire network.
Fake Liquidity Pools
Malicious actors create fake liquidity pools to manipulate markets and manipulate prices. The fake liquidity pools are usually backed by large crypto funds, sometimes owned by malicious actors, entities, or individuals. These pools artificially inflate the prices of specific tokens or assets to manipulate the market for personal financial gain.
Price Pumping by Crypto Communities
In this form of market manipulation, a group of investors colludes to artificially inflate the price of a specific asset. These groups buy crypto tokens, spread rumors, and create fake news to build the hype to sell at the induced peak. Perpetrators of this form of manipulation aim to profit quickly from artificially inflated prices.
Overleveraging on Liquidity Pools
To overleverage a liquidity pool, a technically skilled trader use smart contracts to borrow a large amount of money to purchase large amounts of an asset. Such traders artificially inflate the asset’s price and make a quick profit. This manipulation can be dangerous as it can rapidly collapse the asset’s price if the market does not cooperate.
Why DEXs Are Hard to Manipulate
Black hat blockchain developers are guilty of manipulation, but users also play a part. Most users who fall victim to manipulation on crypto DEXs often notice but ignore the suspicious occurrences in a feat of greed. If they don’t buy these unknown coins, it would be impossible for the hacker to pull their heist.
Centralized manipulation has far-reaching consequences for investors since the scale is larger, and more people often fall victim. Some centralized exchanges even use data to trade genuine blue-chip cryptocurrencies against investors, making millions of dollars daily.
Such manipulations are rare on decentralized exchanges since no one has exclusive access to user information. Using the Best DEXs guarantees some level of fairness unobtainable on centralized exchanges.
Use This DEX On BNB Chain To Avoid Manipulation
The Binance Smart Chain network is one of the biggest blockchains after Ethereum, with millions of transactions executed daily. Selecting the best DEX on Binance smart chain may seem hard, but it is simple.
A crucial factor in determining a DEX free from manipulation is a long-term commitment to serving users of the exchange. Such a commitment is expressed through user-focused products and experiences that help platform users grow their income daily.
Pandora is one of those exchanges with a clearly defined ecosystem. Pandora users earn EXP for executing hashrate-eligible trades, upgrading DroidBots, trading NFTs on the PandoMarket, buying tickets, unlocking staking slots, and opening PandoBoxes.
Aside from EXP boosting activities on Pandora, users can also invest in innovative and stable investment products like Pandora NFT Securities. Pandora NFT Securities are the first decentralized and flexible assets backed by traditional finance that offers guaranteed returns. The Pandora team also organizes reward-focused events and opportunities to give back to lucky and deserving users of the platform.
Conclusion
Manipulation is possible on centralized and decentralized exchanges. However, the aftermath of manipulation on centralized exchanges may be fatal and spread into other areas of the crypto space. Unlike centralized exchanges, traceability makes it possible for hackers to get tracked. Some hackers willingly admit and return stolen funds when the are under the radar after exploiting a decentralized exchange.
With decentralized exchanges, it is harder for hackers to attack the system, and users have full control over their assets. Decentralized exchanges offer additional privacy and innovative products, such as flexible yield farming in stablecoins and native tokens. Founders of centralized exchanges may divert funds to other uses leaving users in complete devastation while protecting themselves with bankruptcy filings.
These materials are for general information purposes only. They are not investment advice, a recommendation, or solicitation to buy, sell, or hold any digital asset or engage in any specific trading strategy. Some crypto products and markets are unregulated, and you may not be protected by government compensation and/or regulatory protection schemes. The unpredictable nature of the crypto asset markets can lead to loss of funds. Tax may be payable on any return and/or on any increase in the value of your crypto assets, and you should seek independent advice on your taxation position.
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