Solana activity on DEX may be due to wash trading

Solana (SOL) is a highly liquid asset, but it has fought allegations of having non-organic traffic. DEX trading on Solana took off in H1 thanks to Raydium, but top tokens show a disproportionate bot activity. 

Solana DEX are venues for wash trading, swaying the price of meme tokens. SOL itself is unaffected, as it is mostly trading on centralized platforms and is more difficult to manipulate. Overall, low-priced, recently launched meme tokens are the assets most affected by bots or wash trading. 

DEX trading is key for Solana, as a tool to increase fees and show the network has sufficient user activity. But DEX also draws in bots, often producing pumps for new tokens. Wash trading data is based on transparent DEX information, and uncovers a mismatch between order book depth and trading spreads. 

Solana wash trading volume on DEXs is increasing: pic.twitter.com/H0rIXrfdnQ

— Stablecoin Intern (@Degenerate_DeFi) July 30, 2024

In addition to wash trading, algorithmic bots can also imitate organic activity, by creating and filling orders that are more diverse and mimic the behavior of traders. Those fake orders, usually involving wallet clusters, are another way to artificially increase trading volumes for tokens. 

The most recent peak in DEX volumes comes from Moonshot and Pump.fun, two of the fastest venues to launch new meme tokens. The tools available to new token issuers also means not all of the exchange volume is organic. In some cases, using wash trading is a way to over-hype a token before a rug-pull. Trading also happens between wallet clusters, as visualized by Bubblemaps. 

The main reason for this activity are the extremely low fees on Solana. Even at peak activity, fees rose to $0.02, though remaining at a higher baseline. Fees rose to as much as $5M per day on the busiest days, and are at a higher baseline, with $2M in daily fees for the past few weeks. Most of the fees are also retained as revenues by validators. The increased activity comes at a cost, as validators require more than $9M on a daily basis, coming both from fees, but also from newly created SOL. 

SOL tokens are, for now, absorbed by staking, liquid staking and other utility use cases. The increased Solana activity is still seen as bullish, though there are skeptics claiming the network was wasting its potential in facilitating token rug pulls, dust transactions and bot activity to inflate trading volumes. Solana supporters, however, have claimed that wash trading affects Ethereum and Polygon more seriously. For now, the number of Solana wallets does not completely correspond to the reported on-chain and DEX activity.

Solana fees expanded by more than 10X since March, and were not affected by the subsequent market correction. In July, fees and meme token activity took off again, with no signs of fatigue for newly launched and older memes. 

Memes go through multiple wash trading cycles

Solana meme tokens have different patterns of wash trading. Overall, wash trading makes up around 30% of reported volumes, with the rest still divided between bots and individuals. Solana trading always carries some form of automation to optimize transactions, so the presence of bots does not exclude real traders. 

Older memes like BOME and WIF have a small fraction of wash trading. Usually, meme tokens with high wash trading activity have a higher overall volume, especially if they are trending. Newer tokens like AURA currently have more than a 10% share of wash trading. 

The early days of DADDY and MOTHER, two of the most prominent Solana meme tokens, also got a boost from wash trading. Those tokens have also been noted to contain wallet clusters with fake-organic trading between insiders.

Wash trading surpassed organic volumes for some of the currently hot tokens, and served as a tool to bring attention to the project. In the case of POPCAT and PONKE, wash trading helped to cause a rally in organic activity. 

Other assets like SLERF have slowed down their DEX activity, and have almost no wash trading, but no significant volumes as well. Not all wash trading can be exposed, and users turn to researching each token for fake trading or even social media activity. 

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Cryptopolitan reporting by Hristina Vasileva