How On-Chain Data Uncovers Manipulative Token Practices

As the popularity of cryptocurrencies rises, so do the instances of potentially fraudulent activities like pump-and-dump schemes. Utilizing on-chain data, analysts can unravel the intricacies of these schemes, shedding light on the tactics employed and their impact on the market. Chainalysis did some interesting analysis on this recently; this post attempts to deliver a concise understanding of their research.

The Rise of Token Launches: A Closer Look

The cryptocurrency market witnessed a surge in token launches on Ethereum throughout 2023, with a notable increase in monthly launches, reaching nearly 50,000 per month at its peak. While this may seem like a sign of a thriving market, not all tokens gain significant traction, with less than 14.1% achieving substantial liquidity within a month post-launch.

Identifying Pump and Dump Patterns

One prevalent scheme involves actors hyping up a token to attract investors, only to sell off their holdings once the price reaches a peak, leaving others with losses. Through on-chain analysis, patterns indicative of such schemes can be uncovered. For instance, tokens meeting specific criteria, such as significant liquidity removal by a single address shortly after launch, may indicate potential pump and dump activity.

A Deep Dive into On-Chain Data

Using data from Transpose, analysts identified tokens meeting certain criteria suggestive of pump-and-dump schemes. Approximately 90,408 tokens fit these criteria, comprising 24.4% of all Ethereum launches and 53.6% of tokens listed on decentralized exchanges. However, their trading volume accounted for only 1.3% of total Ethereum DEX volume in 2023.

Quantifying the Impact

While actors behind tokens meeting these criteria collectively amassed $241.6 million in profit in 2023, the average profit per token was relatively low, highlighting the limited success of these schemes on an individual basis. Moreover, the majority of tokens failed to attract substantial trading volume, indicating a prevalence of unsuccessful pump-and-dump attempts.

A Call for Increased Vigilance

The analysis underscores the importance of leveraging on-chain data to identify and mitigate pump-and-dump schemes within the cryptocurrency market. By employing robust monitoring and regulatory frameworks, stakeholders can work together to safeguard investors and uphold the integrity of the digital asset ecosystem.