Public Key Podcast

The Truth About Crypto Insider and Wash Trading: Podcast Ep. 101

Episode 101 of the Public Key podcast is here and market integrity is at the top of the industry’s and the regulator’s mind when it comes to digital assets.  In this episode we speak to Chen Arad (Co-Founder & CXO, Solidus Labs), who has a wealth of data and knowledge on insider trading and wash trading in the crypto industry.

You can listen or subscribe now on Spotify, Apple, or Audible. Keep reading for a full preview of episode 101.

Public Key Episode 101: Full market integrity includes on-chain and off-chain data 

“To really understand market integrity, you need to be able to monitor for market abuse and other forms of illicit finance, on and off-chain.”

This is a powerful statement from market manipulation, Chen Arad (Co-Founder & CXO, Solidus Labs), who speaks with  Ian Andrews (CMO, Chainalysis) about the heart of market surveillance and integrity in a wildly fluctuating digital asset market.

Chen discusses the need for market surveillance to ensure fair and transparent trading and highlights the challenges of monitoring market manipulation and the significance of on-chain and off-chain data.

Chen also highlights the prevalence of insider trading and wash trading in the crypto market. Finally, they explore the future of the industry and the importance of building compliant and safe services.

He provides insights on the crypto market’s need for robust risk and compliance systems and the growing regulatory recognition of its importance while revealing alarming statistics in Solidus Labs’ Market Manipulation Reports. 

Quote of the episode

“The fundamental infrastructural challenge still remains and there’s a lot of work that’s being done in order to, over time, essentially live up to the trust given to us with that ETF approval.”  – Chen Arad (Co-Founder & CXO, Solidus Labs)

Minute-by-minute episode breakdown

2 |Chen Arad’s background as a journalist and his path to working in crypto and launching Solidus Labs

7 | Understanding the concept of market surveillance and market integrity in crypto
12 | The approval of ETFs as a vindication for the necessity of market integrity in crypto 

16 | The need for cross-market surveillance and integrity

22 | Real-time monitoring in crypto markets and importance of on-chain and off-chain data for market surveillance

28 | Insider trading and wash trading are more widespread than believed 

35 | Unpacking the definition and mechanics of wash trading on decentralized liquidity pools

40 | Wash trading involving malicious smart contract scams and potential money laundering 

44 | The importance of building compliantly and working with regulators 

47 | Potential for cross-market surveillance and growth of on-chain market

Related resources

Check out more resources provided by Chainalysis that perfectly complement this episode of the Public Key.

Speakers on today’s episode

  • Ian Andrews * Host * (Chief Marketing Officer, Chainalysis) 
  • Chen Arad (Co-Founder & CXO, Solidus Labs)

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Hey everyone. Welcome to another episode of Public Key. This is your host, Ian Andrews. Today I’m joined by my friend and CXO at Solidus Labs Chen Arad. Chen, welcome to the program.


Thank you so much, Ian. It’s a pleasure and honor to be here and I probably mentioned to you at some point my name, it’s very confusing. It’s spelled Chen, but it’s actually pronounced [inaudible 00:00:25], which is from Israel we have those biblical sounds in Hebrew. But I don’t expect everyone to be able to pronounce it, so you could call me Chen, but just as an icebreaker.


I love it. I am notoriously poor at pronouncing people’s names correctly, and it drives me crazy because my name frequently gets mispronounced so people will call me Andrew, misreading my last name. So I’m very sensitive to it. Thank you for correcting me. I need to work on my Hebrew so that I can make that sound. We’ll do that offline though. I won’t put people through it here on the podcast.


It’s a great language, but if you’re eyeing a new language, I would vote for Mandarin.


By the number of people who speak it. That is probably the good bet to take. Chen, you and I have been talking about doing this for quite a while, I think maybe close to a year, so I’m super happy that you’re here. I am sure people have heard, that are listening to this podcast, have heard of your company. I actually want to start with your background a little bit because I think you have an unusually circuitous path to working in crypto. So maybe give us your crypto origin story.


Absolutely, and I should mention that I’m very much the exception among our founding and leadership team. Most of us have a deep banking and traditional finance technology background, and my two co-founders came from Goldman. Many others on our team. I, however, as mentioned is the exception. I actually used to be a journalist before founding Solidus. In the Israeli military, I served in the Press Corps and after that got just fascinated with the world of journalism and started doing a lot of writing television broadcasts both in Israel and from the US when I moved here for school. So while I was in college, Brandeis University, shout out to the judges, I did a lot of reporting coverage of many, many various topics all the way from finance and technology, which obviously has become very relevant to my favorite topic, which was actually writing about food.

I’ll say one thing about that, it’s obviously rather unusual. I don’t meet a lot of people who started as journalists and became entrepreneurs. In the journalism world it always feels a little bit like a sellout, but I am actually consistently amazed by how similar really the core of the work is that I used to do then to what it is today. Journalism is a lot about finding complex but important issues and turning them into compelling stories. And at the end of the day, entrepreneurship business is very much about that and you as a marketing leader would absolutely know that, so unusual background, but somehow surprisingly relevant until today.


Well, it’s amazing and I love the point you made there because storytelling, I think in early technology markets is one of the things that people tend to miss. They build a cool product and they want to tell everyone about the product and they forget that for most people who probably weren’t working on the product, they don’t care. You have to give them a reason to care and that is the story that helps them appreciate the problem that you discovered, that led you to build the product in the first place.


That’s such an important point and I think it’s particularly pertinent in crypto. Because we are so enthusiastic as an industry about the technology that we sometimes forget that over-technologizing, and I’m sorry, English is not my native language, so I might be a bit flexible with how I use it sometimes. But over-technologizing it’s not necessarily the best way to reach public adoption, to speak to regulators. And we have tended to do that historically. I actually think that thanks to the leadership of many folks like yourself, we’ve gotten better at it as an industry over the years.


Yeah. Tell me about the time, when did you first encounter crypto?


So it’s funny, in the quick little warm-up conversation we had right before this, we talked a little bit about inspirations. And in my case, I very much through my co-founder and dear friend Asaph Meir. Him and I were actually college buddies. And throughout college we were always like at some point we should start a startup, we should start a startup. I ended up staying there for another few years of school. He ended up going to work for Goldman Sachs. And I should say right off the top that I’ve always found Asaph inspiring and I’ve always knew that he’s one of the smartest people I know While at Goldman, he and Praveen our third co-founder who is Indian and who met Asaph at Goldman, they became very involved with crypto through some of the internal conversations at the bank at the time.

And around that time, I mean I obviously heard about Bitcoin earlier on, but being very honest and I think that’s important because people always wonder if it’s too late to join crypto right now. I remember thinking that in 2017, being very honest, really engaging with it and becoming excited about the possibilities it brings to make finance more accessible, to create more optionality in how we manage our wealth. That’s when I got really excited and I guess the rest is history. I’m not sure how to finish that sentence.


That’s amazing. So around the time that Asaph and your third co-founder discovered, yeah, Praveen started discovering crypto at Goldman, they turned you onto it as well. Take me from that moment to deciding to launch Solidus. What led you down that path?


So what led me down the path is very much Asaph’s leadership. Again, we were always interested in entrepreneurship and trying something. It obviously converged with us becoming increasingly passionate about crypto. And what was interesting for us at the time is I remember stories about how in 2017 while we were having these conversations, some of the big banks in the world were still adapting some of their compliance and risk capabilities and systems following the 2008 crisis. It was very clear to us that even with assets and ways of conducting finance that have existed for decades, the risk and compliance question can be very challenging for large organizations and the government to regulate them and consumers to adapt to. And with crypto or blockchain based finance, we’ll probably use a lot of different terms throughout the conversation. The fundamental infrastructure that it brought was so different that it was clear to us that the challenge is going to be even greater.

And that there’s an opportunity not only for crypto to transform finance, but for firms like ours Chainalysis, which of course existed I believe since 2013 or 14, to also transform the way financial risk is monitored and the way it’s regulated. And also being very frank at the time we saw that there are great companies, Chainalysis was the leader that are specialized in the on-chain transaction tracing. What we didn’t see a lot of people talk about is market manipulation. I mean that’s not exactly precise, because there was a lot of talk about market manipulation. I remember as early as 2018 reading reports, I think the one Bitwise included in one of its earlier ETF applications with numbers like 95% of the volume is manipulative, 75% of volume is manipulative.

It was all very top to bottom. It was very clear to us that while the digital asset world loves to talk about decentralization and the assets are truly decentralized, the vast majority of the activity, the trading 90, 95% is actually centralized and that just looking on chain is not going to be enough to really understand market integrity, you need to be able to monitor for market abuse and other forms of illicit finance cross on and off chain. And we set up to build Solidus as the category definer for crypto native market surveillance as Citigroup later in 2021 named us.


It is amazing because I think anyone that’s familiar with equity markets like this concept of market surveillance, market integrity well known. There’s been rules around that for a long time. There’s lots of technology in place as well as regulations to ensure that there’s a modicum of fairness, I would say, in the way that equities or bonds or commodities are traded. But I’m also going to guess back in 2018 when you launched the company, that may not have been the reaction, particularly from folks in crypto. Take us back to that moment. How did people react? Were they clamoring for the product or was it something else?


Let me put it that way. I have very, very vivid memories of going to conferences 2017, 2018. Even the more, let’s call it institutional oriented conferences at the time, what we call RWAs today at the time was people called security tokens. Anyway, they were actually conferences that were quite institutional oriented. But anyway, I have very vivid memories of going to conferences at the time saying we’re Solidus, we provide a crypto market surveillance solution and getting a lot of raised eyebrows. Best case scenario we would often get, what does that even mean? Worst case scenario, we did actually get at the time something that I don’t think we would hear today, but at the time we would also get some, “What are you here to ruin the party?”

Now we thought differently. We thought it’s really important. We thought it’s not possible to really invite the investing public retail and institutional into this if we’re not better at ensuring that the prices they’re getting are fair and integrity driven. And so the response was oftentimes that way. It is important to say, very rarely has anyone told me directly, we don’t want this, it’s not important. Adoption took a little longer as the industry continued to grow. I always remember that in 2018 April, 2018, the CEO of one of the largest crypto exchanges in the world said publicly and on purpose intentionally crypto traders don’t want or care about market manipulation. I don’t think anyone would say that today by 2020 there was already a high level of adoption and I’m sure we’ll get to it later, but the regulatory landscape is really shifting towards requiring this sort of solutions. So it’s a constant acceleration in terms of adoption. But yes, five, six years ago, not quite the same.


A lot of skepticism, which is actually very consistent with the Chainalysis journey as well, I’d imagine. I think initially the company was seen as, like you said, ruining the party. But as more and more serious people who have come into the space that’s shifted and they almost expect these kind of guardrail or protection technologies to be available and when they’re not, it’s a concerning red flag that’s keeping a lot of people on the sidelines. I guess I would have to imagine the ETFs being approved because one of the major objections to ETF approval was lack of market integrity. That had to be a crowning moment, a vindication of the necessity for what you all have built.


Look, first of all, I think it’s a crowning moment and a moment of celebration for the industry as a whole. I, for a long time, I think it’s fair to say I was slightly in a minority opinion amongst the industry. Because I actually, I think I read every single rejection document over the years. I’m not sure if that’s something I should be proud of or not, but I’m a bit obsessed for the matter. And while I’ve always wanted and hoped for the ETF to be approved as soon as possible, I also always thought that there is a point to what the SEC is saying. Because to me, the piece in the rejection document that was really around what’s referred to as shared surveillance and the ability to understand if manipulation happened across multiple markets, it really speaks to how different and unique Bitcoin and therefore most blockchain based assets are.

The way I summarize it in my head is really it was about the fact that this is the first example of a non-physical asset that is not owned or is native to one particular platform. At the end of the day, an Apple stock or any stock, it has many derivatives. It’s traded in many, many ways, but ultimately the spot market is usually in one place. And if it’s not, maybe there are a few other ones, they’re also defined while Bitcoin ultimately can be traded anywhere by anyone whenever they want, the reality of decentralized assets is that, no one will ever be able to surveil every single trade everywhere. And the way I always read the language in the rejection documents was basically the SEC is saying, “Okay, so we understand that over the years it also of course evolved with the industry. We understand that there are exchanges and important exchanges that are regulated and surveil. We understand that we even approved a futures ETF Right based on CME’s futures market.”

So we understand that we can get confidence that there’s no manipulation within those individual markets, but how do we know hypothetically that there isn’t 100 colluding actors that are creating thousands of wallets and are doing small trades across thousands of venues that are very hard to capture and therefore ultimately the price is manipulated and we won’t have the ability to know and it might affect us investors. So that to me is a fundamental infrastructural challenge created by the advent of decentralized blockchain based assets. That being said, we have to remember when we have this conversation that it’s not like traditional finance is perfectly unmanipulable, so ultimately that’s a problem that there are a lot of really smart people here at Solidus and other places as well thinking about how to solve that in a way that doesn’t also impale the idea of decentralization.

There are really interesting conversations on cross market surveillance that various regulators and non regulators are hosting. But at some point also I think, and that’s ultimately what happened in the way my interpretation of the ultimate approval, it’s been enough time that crypto has grown enough, enough organizations have raised the standards of the integrity of their platforms through including surveillance and other guidelines. We have some really, really thoughtful smart compliance teams and crypto that actually larger market surveillance teams and cryptos can often be larger than in traditional finance and mend, or should I say full of people who come from traditional finance and over time ultimately with the help of some legal pressure where essentially in the grayscale case the court sort of said, “You can’t keep on, this is not justifying rejecting it, that it was time to approve it.” It was a crowning moment.

We do believe that our work advancing market integrity individually with our clients and of course through engagements with across the industry, years of co-chairing market integrity, code of conduct working groups and stuff like that was important. It’s also just about the industry maturing and understanding, again, like the process I described earlier that you cannot grow if you don’t address this. But the fundamental infrastructural challenge still remains, and there’s a lot of work that’s being done in order to over time essentially live up to the trust given to us with that ETF approval. And, it’s kind of make sure we work with regulators and as an industry to introduce the right frameworks again that enable the potential of decentralization by mitigating the risks, but without impaling what decentralization can and should be.


Yeah. It’s such an interesting challenge. I mean, I think as we’re recording this, just a week ago there was a flash crash in one of the bigger exchanges who’s maybe more known for their derivatives business than their spot market, and at least the initial suggestions were that there was a single trader who was dumping large blocks, selling large blocks of Bitcoin. And for a moment, I think maybe up to an hour you could have purchased at a price that was somewhere south of 10,000 USD despite the broad market price obviously being in the mid to upper 60s. And so I think that is case in point of the distributed nature of the trading venues. In the US I think there’s five stock market like equity trading venues and they’re all fairly well-connected and all the brokerages who are able to trade on them are also fairly well-connected. So there’s very rarely a moment where you have a price dislocation even for a few seconds of variance.


Right, and it’s interesting, someone on our team pointed out to me that in traditional finance the thresholds are quite low, like for securities, if the price goes up or down very abruptly, more than a few percentages, it could actually justify reversing the trades. And that ultimately leads also to… That’s not something you can do with a completely decentralized asset. You could maybe in one platform but not for the entire asset, and again, that I think is a great kind of another angle into that fundamental infrastructural challenge, so thank you for saying that. I will say, look, it’s not the only case of a flash crash or a flash jump. I mean these things happen. It is ultimately, they happen even in Bitcoin, which is obviously the most liquid market. And yes, they really speak to the challenge of what happens in each individual exchange off-chain compared to what happens in the broad market.

The one thing I would say is that, when something like that happens, having a strong surveillance program is absolutely critical because you can with the ride on and off-chain risk monitoring and surveillance program, you can within minutes understand exactly what happened and whether it requires more severe steps or not, and what needs to be done in order to put things back to order, and of course to also provide a response to regulators and the public. I will also say that in the longer run, one of the interesting things about market events in traditional finance is that it’s not done in real time. It’s always usually T plus one, T plus two. Essentially you take all of the data and then you look at it and see if something happened that it was wrong.

I think there’s a good chance that crypto is going to drive a change to that with real time if you really monitor the trading in real time and look at the right data sources. Again, the key here is on and off chain, you can actually, we believe, prevent it in certain cases. But at the very least you’ll know about it very, very quickly so that actions can be taken. And I think that, again, I have three examples in my head at least of very, very abrupt price changes that happens in specific spot markets. And again, what really makes the difference there is if you have a smart team that is able to respond quickly with the right program and technology in place.


Yeah. You’ve mentioned a couple of times this idea of on-chain plus off-chain data. Be more specific. When you talk about off-chain data, what are you imagining? I can guess order book data on centralized exchanges would be one really important data set because that’s where so much of trading activity, as much as we talk about DeFi, so much of the actual trading activity is happening inside of an exchange order book. Maybe over-the-counter trading desk data would be potentially another source, although I don’t know how easy that is to access. What’s in the universe of data that Solidus uses to achieve some of the market surveillance.


So I would venture to make a lofty statement. I genuinely believe that this cross on and off-chain risk monitoring function is absolutely fundamental to addressing market integrity in crypto. It requires collaboration between companies like ours, but it also requires a recognition that while we love to talk about decentralization and we love to talk about on-chain, the majority of the activity trading activity, price formation, etc, happens off-chain. Now because when we started the company, we really focused on that market manipulation question and because most of the trading and therefore trading manipulation happened off-chain, really something that we spent a lot of time and resources figuring out the best way to address and monitor for market abuse, market manipulation with off-chain data. Off-chain data specifically, I mean you called it order book data. At the end of the day, I think a centralized crypto exchange in a lot of ways is you take a digital asset, you take a blockchain-based asset and you force it into a familiar order book setting which was developed and perfected with centralized assets.

Now it’s critical. It creates a lot of efficiencies. It’s absolutely the gateway for most people who trade in crypto, and it’s probably also how I believe over time, most people will continue to engage with digital assets because the reality is that most people prefer to work through an intermediary at least in the foreseeable future. But it’s not the fact that you put it into an order book, does not mean that it’s exactly the same as a centralized or let’s say a security in an order book. There’s so much just the fact that crypto is 24/7 with different numbers of decimal points, etc. Those are pretty trivial, but they actually create huge operational issues in terms of being able to monitor for manipulative behavior. But the fact that the asset is also at the same time, the price is also formed through activity and a lot of other exchanges and on chain just means that it’s centralized or not.

Like crypto data and crypto trading is different to process and there are new risks that are not necessarily familiar from traditional finance. There are also a lot of ways to execute similar kinds of manipulation differently and therefore they need to be detected differently. But anyway, to your point, off-chain trading data order book data, which some of it is made public and there’s a lot of obviously companies that do great work standardizing and allowing the purchase of data, but ultimately for a full understanding and confidence that there’s no market manipulation, you do need to look at the full depth including cancellations, including order, including all orders, etc, that’s a big part of it. There are other kinds of off chain data, which is really important. For example, we specialize in the market manipulation, market surveillance piece, but another piece of data we work with a lot is off chain transaction data. Versus deposits from wallets or into wallets versus transactions that take place on the blockchain.

At the end of the day, there’s just a lot of off-chain transactions on centralized ledgers. And some of it is crypto to fiat, some of it is fiat, but because they happen in correlation to digital assets, that’s also a very important piece that can help indicate malicious behavior and oftentimes needs to be connected to what comes from the on chain analysis that obviously you guys specialize in. There’s also other examples, things like news data, which is quite critical. That’s off chain just simply because it’s not on chain, which is very listing announcements, stuff like that. And also there’s a lot of other forms of risk related data. It could be KYC, it could be other things. The bottom line is that we really specialize in the trading piece, but by looking at all of these off chain data pieces and then connecting them through integrations that we are very happy to have with a partner like Chainalysis and also just looking at Dex-Trades on-chain, etc, that’s where ultimately the best picture can be provided on market integrity individually for platforms and for the market as a whole.

One of the challenges of off-chain data is that it’s private and it should be private. And of course, but in that sense it can be become a bit of a black box from the perspective of regulators, from the perspective of blockchain sleuths. And so again, being able to create that connectivity is really core to our mission and core to solving, I believe the market integrity question. I’ll just mention that I was in Japan quite recently. The Japan Financial Services Authority invited us, they also invited Chainalysis. Caroline Malcolm was there and rocked the floor as usual with her incredible policy work, but they specifically invited… I was specifically on a panel that was based on a paper the JFSA published specifically on the importance of on chain and off chain risk analysis to understand the health of decentralized ecosystems. Which I remember when they published that paper in July, it was one of the happiest days of my life because I was like, yes, we’re getting there, they get it.

So just to give an example of the fact that there’s also, there’s some language about it in Mika’s technical standards that were just put out for consultation and across the board you’re seeing that there’s a recognition that full market integrity picture requires the cross section of on and off chain data.


Yeah, it’s so amazing. I want to talk a little bit more about the risks that you touched on in that last comment. You guys actually published a great report. We’ll link to it in the show notes. Everybody should go download it and read the whole thing. But some of the stats here kind of blew me away. In particular, insider trading and wash trading seem to be much more widespread than I sense the market at large appreciates. I think you published that about 56% of token listings since 2021 had some evidence of insider trading. Can you talk about, unpack that statistic for us? How did you come to that assertion? What does that really mean for us as users of crypto?


Oh, absolutely. So our report, it’s important to say that ultimately it’s a sample of the market. It looked at a few very large, some of the largest exchanges in the world, centralized exchanges. And essentially at all of the ERC20 tokens or the most of the ERC20 tokens that were already available on decentralized exchanges, but then listed on those centralized platforms between January 2021, and I believe mid-2022. So important to say it’s a sample, but every platform is different, et cetera. But bottom line is that, we think it’s a pretty good representation. Really what it looked at, it used, we have a tool that specializes in identifying this sort of insider trading. It looked at instances essentially when there’s a listing where someone in a very precise way, somehow he was able to buy the token in the few days to a week before the listing and then somehow miraculously also sold it immediately within minutes after the listing itself.

Insider trading is not something crypto invented, and I’ll emphasize again, none of the things almost that I’m going to talk about today are stuff that crypto invented. Unfortunately, traditional finance, someone gave you the estimation that 10 to 15% of all corporate news is accompanied by some sort of insider dealing. So it’s not something that crypto invented, but it’s obviously, it’s very interesting to regulators because it’s almost obviously legal depending on the definition of the asset, but it’s absolutely obviously wrong because what it means is that someone had information and they unfairly used it to make benefit against just normal investors.

So as you said, the finding was that in 56% of those listings, they were accompanied by very suspicious evidence of those sort of buys and sells. It’s important to say that it’s not necessarily… Oftentimes the immediate thought when you talk about insider trading is the listing exchange. Someone at the listing exchange probably knew, but it’s not necessarily the platforms. There’s enough people who could have access to this sort of information by virtue of being part of a project that’s being listed, maybe an investor. And interestingly, there’re also because of the transparency of the blockchain, there are also ways in which sophisticated actors sometimes are able to just recognize just looking at on-chain activity that there is certain interest from a centralized exchange in an asset. And then sometimes, and there are various new ways because of the transparency of decentralized assets that MNPI material, non-public information could be created.

And the bottom line is, I mean, look, we think long and hard every time before we, as I’m sure you do. Every time before we publish a research like that, because we are part of the industry, we want it to succeed. We’re huge believers that sunlight is the best disinfectant. And that markets that aren’t fair don’t last, and crypto is not going to manifest its potential if it’s ultimately markets that are driven by insiders. So anyway, that was the main takeaway from that report. And again, it’s very interesting to regulators because insider dealing, unlike say if you talk about, I don’t know, block level, front running, it’s something that regulators and law enforcement agencies really get. And I will mention that there have been a couple of cases in the US, one of them with a former Coinbase employee and one of them with a former OpenSea employee that actually ended in jail sentences.


Yeah, it’s a very serious problem. I think the other one that came up for me reading the report was about wash trading. And we’ve done some research on this as well at Chainalysis, and it’s interesting because there’s certain platforms that actually seem to encourage it, a number of marketplaces that have a reward system for trading. And depending on the economic model that’s applied to that reward system, it can be very lucrative to pay the gas fees to send an asset back and forth to yourself, two wallets that you control, collect the reward for the trade, and then you’re profiting from not real activity. I am kind of curious, you made the comment that insider trading obviously makes an unfair market that ultimately doesn’t last. Only fair markets kind of become enduring. Would you apply the same logic to wash trading? Because it does seem like some folks, they’re encouraging it to demonstrate traction on a platform and build a following.


Yeah, well, I think the bottom line is, is it real traction or is it made up traction? And look, we come from marketing and content and there’s always an element of you need to get things going, you need to create some traction. But let’s talk about the wash trading report for a second because it is, I would say a little different for a few reasons. Insider trading at the end of the day is very straightforward wash trading, let’s define it briefly. Ultimately it’s about non-economical trading. It’s essentially where one trader or collusion between a few of them trade back and forth to create volume without the price changing. It’s essentially about artificially inflating volumes. Now, the way we approached it, so obviously that particular, while the insider trading report really looked at that cross-section between on and off-chain, decentralized exchanges and centralized exchanges, wash trading, we really looked up purely at decentralized liquidity pools. And that obviously trading there works mechanically different.

It’s not the same kind of order book mechanism and bid and ask. And wash trading has been defined based on a centralized order book. Wash trading at the end of the day, we needed to do some, we proposed essentially a definition that we believe aligns with the original definition of wash trading, but really it’s about understanding when a particular actor creates artificial volume. In that particular case, and by the way, it’s detailed really well in the report and written by people who are way smarter than me. So for anyone who’s interested, I really suggest digging into it. It’s available for free. But basically we looked specifically for what we anticipated would be problematic liquidity pools mostly on Uniswap, which at the end of the day is the largest and most significant decentralized trading protocol.

And there are a few definitions that go into it, but specifically we looked at cases where one wallet or a group of very clearly associated wallets are responsible for providing more than 90% of the liquidity to a particular pool, and then is also responsible for more than 50% of the swaps either directly from the same wallet or again through other wallets. Obviously, when you have a situation like that, it does not look like real trading. By the way, it’s not necessarily illegal, it’s unregulated trading. But do we think that it’s legitimate liquidity? I mean, I think there are some questions around it. Obviously we’re interested in market manipulation as a whole. Part of the reason it was important for us to demonstrate that this does exist and unfortunately not at a small amount. We found around 2 billion worth of wash traded assets using that scheme.

The reason it was important for us is because, and by the way, tell me if you agree, but I’ve always felt that there’s a bit of a sentiment that wash trading and artificial volume is not possible on Dexs. Because it’s not profitable, the gas fees are too high, which all of it is correct, but the bottom line is that we very, using our tech, we were able to find quite a bit of this and really when we limited it to a small subsection of Dexs. What I will say is that while the insider trading report, I believe is actually quite, it does extrapolate, my hunch is that it does extrapolate for the broader industry. The wash trading one doesn’t because we did specifically look for places where that might happen.

So I think we looked at around 30,000 liquidity pools, and again, based on those very specific definitions, and we about 67% of them had evidence of this sort of behavior. I don’t think that 67% extrapolates for the entire decentralized exchange landscape. So it is important to say that I actually think that if you look at it, it’s potentially very good news. It shows to regulators that yes, there is wash trading, but it’s generally contained. And again, there’s more research to be done, and we are working with a lot of decentralized exchanges in order to understand how, again, you can monitor for these risks without limiting decentralization. But I actually thought it was good news because it’s not that common. The last point I would say, and I’m sorry, I tend to talk a lot, so feel free to just tell me to move on to the next one, but the last thing I’ll just say briefly is that it’s about 50% of the liquidity pairs that we looked at included one token that we also assessed to be a malicious, hard-coded smart contract scam.

Now, that makes a lot of sense because if you deploy a hard-coded ragpoll scam as a token and you want to get people to invest in it, they might not know that there’s pieces of code that mean that you can deposit and not withdraw, etc. One of the best ways to make people feel like it’s legit is create some liquidity around it, but that’s not the only case in which it happens. We’ve also identified cases where they’re completely or at least seemingly legitimate tokens, in which case we suspect it might be money laundering or who knows. But the bottom line is that the volume does not seem legitimate.


Yeah, it’s consistent with research that we’ve done as well, which is indicative that there’s a class of tokens that get deployed on the Ethereum network, and this would probably apply to other networks as well, but we specifically focused on Ethereum is just the biggest one where a small number of individuals are creating new tokens, deploying them, creating enough liquidity that they can actually list on a Dex, promoting it in some way, drawing in investor liquidity, and then running off with a real asset, whatever the trading pair that was deposited actually is. In individual instance most of these are relatively small. This isn’t like a dog with hat or pet Bitcoin or something like that. It’s stuff that 99% of people that participate in the ecosystem have never heard of. Where it’s thousands of dollars of liquidity are being stolen. But there were some outliers that were quite a bit larger.

And I think wash trading is just one of a few tactics that can be used to promote some interest and followership often combined with the social media campaign, often combined with conspirators who are working alongside that are maybe legitimate trades in the context of being multiple parties, not just a single person trading with themselves, but it’s coordinated trading activity. So my advice to everyone is operate with caution. There’s likely somebody on the other side of the trade that has more information than you do.


Oh, absolutely. And look, and it’s true again in traditional finance, I cannot stress that enough.


Yeah, absolutely.


Yeah, I mean, I think JP Morgan just got a massive fine for issues with their surveillance system, and it happens. You always have to be cautious, and we as an industry need to not let our enthusiasm make us forget to remind people that at the end of the day, you have to be cautious specifically when it’s a new trading environment rooted in new technology and when there’s so much FOMO. And you guys, I read all of your reports. You’ve done incredible work also exposing some of this stuff.


Well, thank you. I want to, we’re running out of time here. I want to make sure that we hit on my favorite and customary closing question, which is, you all have built an amazing business over the last six years. You’ve made a lot of progress even bringing to the forefront this concept of market surveillance is being necessary and useful in the world of blockchain and cryptocurrency. Where do we go from here? What’s on the horizon over the next year that you’re really excited about?


Well, knock on wood, and I’ll actually knock here on wood. I think there’s a lot of signals that indicate we’re entering a bull market. A bull market is an incredible moment always, and we’ve been through a few by now, so you need to be careful and take things with a grain of salt. But with the bull market, of course, volumes increase, interest increase, more investors come in, et cetera, et cetera. And we have an opportunity to show that we’ve learned from the last few rounds. It’s funny, I was just in Singapore for our Docom Singapore event and I’ve spent a lot of time there recently and really became inspired with Lee Kuan Yew, the founding father of Singapore. Just an incredible, incredible thinker. One of our employees there, shout out to Justin Lin, gave me the book as a present and been diving into it, and he talks…

So I was kind of looking to see if I can use a quote about crypto from him, but believe it or not, the Grandmaster of Singapore has not wrote a lot about crypto, but what he does write a lot about is complacency. And complacency as a killer of motivation. The fact that when things go really well, we tend to expect to get more for less hard work. And I think this is very relevant for this moment. You asked me what’s coming. So I think one of the most important things is that, and companies like ours really need to champion that. One of the most important things is we cannot take the risk of people forgetting how important it’s to build compliantly work with regulators.

Now is the time to work harder to provide the best market integrity standards and invest more with hopefully all of the new profits that will come and invest more in building safely, not less. More specifically, we’ve been seeing regulators increasingly maturing their approach to the industry from a focus on AML preventing money laundering and financial terrorism, where of course I know so many of them use your incredible technology. But they’re increasingly maturing their approach to also look at market integrity and comprehensive programs. In the next two to five years having market surveillance in place and thoughtful market surveillance programs is going to be critical.

We as an industry need to constantly think, how does that translate into smart compliance programs? Requirements are one thing. How do we take the more clarity the regulator provided us and turn it into compliance programs using the right technologies like to Chainanalysis and Solidus that enable the merits, but mitigate the risks. Specifically I think there’s going to be a lot of very interesting conversations on this cross market surveillance piece because ultimately over time you’re seeing markets like Europe, which is already cross-border. There’s a lot of potential to understanding how trading an individual centralized exchanges corresponds with one another and with the on chain market, which is also expected to grow.

And then beyond that, I’ll just say the classic things that I think we’re all thinking about. I’m already seeing a lot of institutional adoption. I think we’re going to be seeing really interesting institutional buying into products like staking, into products like real-world assets. And there are a lot of questions that we are thinking about as I know you are, and I know regulators are in terms of how do we in those contexts as well mitigate the risks in order to enable the potential. So it was a bit of a kitchen sink answer, but I hope that it makes sense. Most importantly, now’s the time to work harder to enable compliance, safe and regulated services not less hard.


I love that perspective. That’s a terrific place to finish the conversation Chen this has been amazing and I hope to see you in person soon. We can continue the conversation.


Hopefully at Lynx. I hope I’m not dating this episode, but Lynx is coming up. Can’t wait to see you.


I will be there as will a few thousand of our closest friends, so drinks on me. We’ll see you soon.


Counting on it. Thank you so much for having me.


Yeah, absolutely.