The recently published Kaiko Research report has brought to light the prevalence of market manipulation tactics, such as sandwich attacks, on decentralized finance (DeFi) platforms like Uniswap and Hyperliquid. This issue has been a significant deterrent for institutional players who may otherwise be keen to engage with DeFi.
A pertinent example of such tactics is the recent incident involving a USDC-USDT liquidity pool on Uniswap V3 on Ethereum. A user, intending to swap 220,800 USDC for USDT, was thwarted when an attacker sold almost 20 million USDC for USDT before the user could execute the swap. The sudden sale precipitated a drastic drop in the price of USDC to 0.024 USDT for 1 USDC. As a result, the user received a mere 5,300 USDT instead of the anticipated 220,800 USDT, resulting in a staggering loss of 215,500 USDT. This incident underscores the vulnerability of DeFi users and the need for stronger protection measures.
In the absence of robust protections, institutional players are unlikely to engage with DeFi, which will continue to invite scrutiny from regulators. This view is shared by Robby Greenfield IV, CEO and founder of Umoja Labs, who sees asset security as a paramount concern for institutional investors. “These manipulative tactics,” Greenfield opines, “hurt DeFi’s chances of going mainstream.”
However, Ryan Chow, co-founder of Solv Protocol, contends that the real obstacles to institutional participation in DeFi are the lack of sustainable yield and the small size of the market, rather than market manipulation. Chow suggests that, if motivated, institutions could potentially exacerbate DeFi’s market manipulation problem.
With the aim of bolstering institutional confidence, Greenfield proposes measures such as full insurance coverage for DeFi assets as well as transaction privacy or obfuscation methods. These measures, according to Greenfield, will help mitigate financially motivated attacks.
On the topic of user protection, Bryan Chu, chief product officer at WOO X, believes that user education is the most effective way to counter manipulative tactics. “Education should be integrated into the trading experience,” Chu asserts, “For example, a tooltip explaining slippage tolerance or an alert suggesting an order size adjustment could help avoid a sandwich attack.”
Chu also emphasizes the responsibility of DeFi platforms to develop risk control measures to reduce market manipulation. While he recognizes the importance of external regulation, he warns against over-reliance on it, as it could compromise the decentralization ethos of DeFi.
Greenfield, however, views regulation as both necessary and inevitable, though he acknowledges the difficulty of striking a balance between regulation and decentralization principles. He believes, “thoughtful regulation can strengthen DeFi rather than diminish it.”
In conclusion, the findings from the Kaiko Research report and the insights from industry experts suggest that a combination of user education, robust risk control measures, and thoughtful regulation could be the path to a secure and trusted DeFi market.
