A Recent Kaiko Research Report on Market Manipulation in DeFi

A recent Kaiko Research report highlights how market manipulation tactics, such as sandwich attacks on platforms like Uniswap and Hyperliquid, deter institutional players from engaging with decentralized finance. An expert recommends full insurance coverage for DeFi assets and transaction privacy to enhance institutional confidence.

Rising Incidents of Sandwich Attacks

The report outlines how market manipulation tactics are causing many institutional players and market makers to steer clear of decentralized finance (DeFi). It cites sandwich attacks occurring on Uniswap and Hyperliquid as examples of the manipulative tactics that make DeFi less appealing to institutions.

To illustrate these tactics, the report recounts a recent incident involving a USDC-USDT liquidity pool on Uniswap V3 on Ethereum, where a user attempted to swap 220,800 USDC for USDT. Before this swap could execute, an attacker sold nearly 20 million USDC for USDT, drastically dropping the price of USDC to 0.024 USDT for 1 USDC due to reduced liquidity and increased slippage in the pool.

As a result, the user received only 5,300 USDT instead of the expected 220,800 USDT, leading to a loss of 215,500 USDT. The resulting slippage created a market risk for all traders using the pool at the time, including the victim of the sandwich attack.

Without stronger protections, the report warns that institutional players will likely remain on the sidelines, facing increased regulatory scrutiny. Robby Greenfield IV, CEO and founder of Umoja Labs, emphasizes that asset security is a key concern for institutional investors. Greenfield argues that manipulative tactics undermine DeFi’s chances of achieving mainstream adoption.

Ryan Chow, co-founder of Solv Protocol, contends that the lack of sustainable yield and market size, rather than manipulation, are primary barriers to institutional participation in DeFi. He warns that institutions equipped with sophisticated trading strategies could exacerbate market manipulation issues, making user education crucial.

Importance of Educating Users

Greenfield recommends measures such as full insurance for DeFi assets and transaction privacy methods to counter sandwich attacks, enhancing institutional confidence. He argues that addressing low liquidity is vital to mitigating market manipulation.

Bryan Chu, chief product officer at WOO X, highlights the importance of integrating education into the trading experience, offering users real-time tips and feedback to navigate manipulative tactics effectively. He suggests that DeFi platforms should lead in risk control measures to combat market manipulation, while Greenfield acknowledges that regulation is necessary, albeit challenging to balance with decentralization principles. Ultimately, he believes that thoughtful regulation can strengthen DeFi.