A recent Kaiko research report emphasizes how market manipulation tactics, such as sandwich attacks on platforms such as Uniswap and Hyperliquid, prevent institutional players from being involved in decentralized finances. An expert recommends full insurance coverage for Defi activa and transaction privacy to improve institutional trust.
Rising incidents of sandwich attacks
A recent report from Kaiko Research outlines how market manipulation tactics many institutional players and market makers ensure that the Decentralized Finance (Defi) remains away. The report mentions sandwich attacks that take place on Uniswap and Hyperliquid as examples of the manipulative tactics that make Defi less attractive for institutions.
To illustrate the extent in which these tactics undermine the efforts to attract the masses to Defi, the report mentions a recent incident with a USDC-usdt-liquidity pool on Uniswap V3 on Ethereum. In this incident, a user tried to exchange 220,800 USDC for USDT. However, before the user was able to carry out the Swap, an attacker reportedly sold nearly 20 million USDC for USDT. This drastically fell the price of USDC to 0.024 USDT for 1 USDC because of what the report described as reduced liquidity and increased slip in the pool.
Consequently, the user only received 5,300 USDT instead of the expected 220,800 USDT, which resulted in a loss of 215,500 USDT. According to the KAIKO research report, the resulting slipping created a market risk for all traders who used this liquidity pool at that time, including the victim of the Sandwich attack.
As argued in the Kaiko research report, unless stronger protection is determined, institutional players will probably stay on the sidelines and Defi will be confronted with a greater investigation of supervisors. This point of view is reflected by Robby Greenfield IV, CEO and founder of Umoja Labs, who identifies asset protection as another important care for institutional investors. In the long term, Greenfield said that manipulative tactics the chances of Defi to harm mainstream.
“Of course, the prominent of sandwich attacks, front-running and the reuse of historically traditional financial commercial practices to exploit the lack of liquidity in Defi-Protocols, inhibit the use of the high volume of most protocols as a source of Investment for Non-Crypto-Native institutions,” said the Umoy.
However, Ryan Chow, co-founder of SOLV protocol, states that the lack of sustainable yield and the relatively small size of the market, instead of market manipulation, are the most important barriers for institutional participation in Defi. Chow told Bitcoin.com news that, if correctly motivated, settings could actually aggravate the problem of the market manipulation of Defi.
“It would not surprise me if institutions – equipped with advanced traders and advanced strategies – worsen the market manipulation of the market, given that private participants often miss the same level of understanding. That is why it is crucial for the average person to be aware of this dynamic and explore potential tools,”.
The importance of training users
In the meantime, Greenfield recommends various measures, including the full insurance of Defi’s assets in control and implementation of transactive privacy or obfuscation methods to combat sandwich attacks. Taking these measures will reduce financially motivated attacks and strengthen institutional confidence, said Greenfield.
In order to tackle the issue of low liquidity, a condition that worsens market manipulation and slipping, the Umoja Labs ceo insisted on Defi protocols to consider building or to develop solutions that meet unfulfilled institutional needs. Protocols must also give priority to the development of intrinsic protocol value before they implement token stimuli.
About the issue of protecting users, Bryan Chu, Chief Product Officer at WOO X, Bitcoin.com News said that this amounts to “offering the best user interface/user experience (UI/UX) to show sufficient warnings and recommendations to potential traders on their trade circumference.” CHU also agrees that user education can be the best way to help market participants tackle manipulative tactics.
“I think education is important and it should be integrated into the trading experience. Users will not go through documents, so the inclusion of real-time tips and feedback in the user interface/UX is more effective. A tool tip explains, for example, slip tolerance or an alert that suggest an order-up-to-be-in-the-door.
In the meantime, CHU said that Defi platforms should take the lead in repeating risk management measures to reduce market manipulation. He said that although external regulations are important, only trust that “Defi decentralization can be damaged by giving regulators the last word.”
Greenfield, on the other hand, is of the opinion that regulations are not only necessary, but also inevitable. However, he admits that the challenge lies in balancing regulations with decentralization principles.
“Standing out of this balance will be complex and take time, but in the end thoughtful regulations can strengthen the Defi instead of reducing it,” argued the CEO of Umoja Labs.
