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Know How DeFi Manipulation works in Crypto

Key takeaways

  • Price manipulation is quite common in crypto, especially DeFi; spoofing and wash trading are some of the most common techniques to carry out price manipulation. 

  • In most cases, retailers are victims of such attacks which are generally carried out by institutions, insiders, or communities.

  • It is important to stay away from or report such actions for increased adoption and investments by the general public.

07 Dec 2022 By : Anirudh Trivedi
Know How DeFi Manipulation works in Crypto

Manipulating the price of a digital asset is a common attack in the DeFi world. In this article, we'll discuss how these attacks work and how you can protect yourself from them. There are two main ways to manipulate the price of a digital asset: by spoofing orders and by wash trading.

These attacks are usually carried out by bots or coordinated groups of traders. They can be difficult to spot, but there are some tell-tale signs that you can look out for.

Prices that move too quickly or in strange patterns may be indicative of manipulation. If you see a lot of buy or sell orders being canceled, that can also be a sign that spoofing is taking place.

What Is Price Manipulation?

You may have heard of the term "price manipulation" before, but do you know how it works?

Essentially, price manipulation is when somebody tries to influence the price of a good or service. This could be done by hoarding a good so that there's not enough for others to buy, or by spreading false information about a product in order to drive the price down.

In the context of Defi, price manipulation can take a few different forms. For example, someone might try to launch a DDOS attack in order to make it harder for people to buy or sell tokens. Or they might try to overload the network with fake transactions in order to disrupt the market.

How Does Price Manipulation Work in DeFi?

You're probably wondering how price manipulation works in DeFi.

It's actually a pretty simple process. Attackers will first identify a target—let's say, the DAI/USD market—and then they'll start by buying up as much DAI as they can. This drives the price of DAI up, which then makes it more expensive to buy back into USD. The attackers will send their tokens for USD or some privacy tokens like XMR. Since crypto is largely unregulated; these attacks are quite normal.

There are many ways to carry out such attacks; the most famous ones are spoofing and wash trading.

Spoofing is when a trader places a large order for an asset and then cancels it before it is filled. This artificially increases the demand for the asset and drives up the price.

Wash trading is when a trader buys and sells an asset simultaneously. This creates artificial volume and can also drive up the price.

It's a pretty insidious process that can have a big impact on the market. But with enough awareness and vigilance, we can help protect against these attacks and keep our networks strong.

Who Benefits From Price Manipulation in DeFi?

You may be wondering who benefits from price manipulation in DeFi. The answer is, unfortunately, not the average Joe or Jane.

Price manipulation is often carried out by big institutions or whales that have the funds to move the market in whatever direction they please. By artificially inflating or deflating prices, these institutions can gain an advantage over other traders and investors.

But we cannot definitively blame anyone since there is usually no direct involvement of institutions or individuals in these attacks, and many times these are just blameless rumors.

For example, during the Terra Luna attacks many Venture Capitals, Hedge Funds, and even Terra's CEO was rumored to be behind attacks by many influencers and investors. Many P&Ds also conduct price manipulation that might affect low market-cap projects.

And while price manipulation can be frustrating for regular users, it's actually a big issue for the DeFi community as a whole. Because if prices are constantly being manipulated, it makes it difficult for people to trust the market and invest their funds safely.

Who Are the Victims of Price Manipulation in DeFi?

You may be wondering who the victims of price manipulation are in DeFi. The answer is anyone who is using a decentralized exchange, or DEX, to trade.

When someone manipulates the price of a token, it can cause havoc in the DEX market. For example, if the price of a token is manipulated to be higher than it should be, people will sell their tokens at a loss. This can cause the market to crash, and it can be difficult to recover from this type of attack. Centralized exchanges are also prone to such attacks but most of them have high to adequate liquidity, on the contrary, DEXes have low liquidity and their AMM algorithms are not advanced enough to stop them.

At this point, the attackers will start to sell their tokens, which will drive the price back down. They'll then buy back in at a lower price, which means they've just made a profit. rinse and repeat.

How to Detect Price Manipulation in DeFi?

Imagine this: you're a part of the DeFi community, and you've been using a particular protocol for a while. You're pretty confident in it, and you've even started to recommend it to others.

But then something strange happens. You notice that the price of the asset you're using has been going up and down in an erratic fashion, and you can't seem to figure out why. You might even start to think that someone is manipulating the price on purpose.

So how can you detect price manipulation in DeFi? Well, there are a few things you can look out for. For example, sudden changes in volume or price could be a sign that something's up. You can also use tools like Etherscan or TokenAnalyst to analyze the blockchain and look for any suspicious activity.

Onchain analysis and strong fundamental analysis are vital while detecting deliberate price manipulation and attacks. If you see any of these things happening, it's important to do your own research and come to your own conclusions. After all, price manipulation is serious business, and you don't want to accuse someone of something they didn't do.

But if you're convinced that there is price manipulation going on, then it's important to report it to the relevant authorities so that they can investigate. Only by working together can we hope to stamp out price manipulation in DeFi.

How to Protect Yourself From Price Manipulation in DeFi?

There's no doubt that price manipulation is a real threat in the world of DeFi. But there are ways to protect yourself from these attacks.

The first step is to be aware of what's going on. Keep an eye on the prices of the assets you're holding, and watch out for any sudden changes. If something looks fishy, it's best to get out of there as fast as you can.

Another thing you can do is use an exchange with high liquidity or just get out of the relevant tokens. This way, you're in control of your own funds and you're not at the mercy of someone else's manipulations.

Finally, don't be afraid to get involved in the community. There are lots of people who are working hard to keep DeFi safe from nefarious actors, and they're always happy to help out.

How to profit from price manipulation?

You might be wondering how someone could profit from price manipulation in Defi. After all, it's not like you can just snap your fingers and make the prices go up or down.

But there are a few ways to do it. For example, you could short-sell a token to drive the price down, or you could buy a token and hold it until the price goes up. There are also a few loopholes that can be exploited in order to make a quick buck.

While buying short/long contracts is one way to make money when it comes to earning from price manipulation; you can leverage your information for investing in liquidity pools and such staking algorithms or you can open spot buy orders at very low price levels; aiming for catching the bottom.

But whatever method you choose, it's important to remember that price manipulation is a risky business. You can make a lot of money if you're successful, but you can also lose a lot of money if you're not careful.

So make sure you know what you're doing before you start playing the market and always remember: just because someone is making money from price manipulation doesn't mean they're doing it ethically. So always be sure to tread carefully.


With the recent rise in the popularity of DeFi protocols, there has been an increase in price manipulation attacks. These attacks work by artificially inflating the price of a token or asset, in order to sell it at a higher price and profit off of the difference.

Price manipulation can have a serious impact on the DeFi ecosystem. It is important to be aware of this type of activity and to take steps to protect yourself from it

Price manipulation is a reality in the world of Defi, but that doesn't mean that you should avoid it altogether. Just be sure to keep your eyes open and do your research before investing.