$241M Scammed in Ethereum Pump-and-Dump Schemes

In the latest Crypto Crime Report by Chainalysis, a fascinating trend in the cryptocurrency market has been highlighted, focusing on the potential for market manipulation through pump and dump schemes. Unlike more straightforward metrics, such as funds directed towards darknet markets or ransomware, the intricacies of blockchain data require a nuanced approach to identify suspicious trading patterns. This complexity underscores the necessity for combining on-chain analysis with off-chain information to unravel the full scope of illicit transactions.

In 2023 alone, over 370,000 tokens were launched on the Ethereum network, with around 168,600 making it to decentralized exchanges (DEXs). However, a mere 14.1% of these tokens attained more than $300 in DEX liquidity in the following month, revealing a market saturated with tokens that struggle to achieve significant trading volumes. This scenario sets the stage for potential pump and dump activities, where bad actors hype a token to inflate its price before cashing out at a peak, often leaving ordinary investors with devalued assets.

Chainalysis developed a methodology to sift through Ethereum’s vast token landscape, focusing on DeFi’s transparent and accessible on-chain data. Their analysis identified tokens that showed patterns indicative of possible market manipulation. Specifically, they looked for tokens with a sudden withdrawal of over 70% of liquidity by a single address after gaining some market traction, a hallmark of pump and dump schemes.

This investigation revealed that approximately 90,408 tokens launched on Ethereum, equating to 24.4% of all tokens and 53.6% of those listed on DEXs, met these criteria. However, these potentially manipulated tokens accounted for only 1.3% of Ethereum DEX trade volume in 2023, suggesting that while market manipulation is present, its impact on the overall market volume might be limited.

The report also showcased a case study where an address was responsible for launching 81 tokens, following a pattern that led to an estimated $830,000 in profit. This included tactics such as wash trading and liquidity removal, which not only inflated the token’s value artificially but also left many investors stranded when the token’s value plummeted.

Despite the challenges posed by these schemes, the inherent transparency of blockchain technology offers a unique advantage. Tools like Transpose enable the monitoring of on-chain data for signs of unusual activity, providing a foundation for safer crypto markets. By leveraging both on-chain and off-chain data, market operators and regulatory bodies can identify and investigate suspicious activities, maintaining market integrity and protecting investors.