The key to prosperity is a well-functioning markets that operate in ways that are fair and effective to sustain public support and confidence. But there are still a few malpractice in financial markets, of trading profits being claimed through manipulation, collusion or dishonesty.
The fairness of the capital markets has been increasingly in the spotlight since the flash crash on 2010, when the Dow Jones Industrial Average lost $1 trillion in market value in a matter of minutes. Laws against insider trading are justified on the grounds that insider trading is unfair. People complain about high-frequency trading because it’s perceived as unfair. Illegal insider trading is rampant and may even be on the rise.
Recently the U.S. Securities and Exchange Commission (SEC) issued a warning about potential internet coin offering (ICO) scams and “pump and dump” schemes by public companies. An ICO is similar to a stock IPO, but instead of buying shares in the company, investors are buying digital “tokens” used on cryptocurrency platforms. Companies built on blockchain, a digital database for recording financial transactions and other types of deals, raise money by selling these tokens, which can typically be used to pay for goods and services on their platform, or just stashed away as an investment.
A pump and dump scam is the illegal act of an investor or group of investors promoting a stock they hold and selling once the stock price has risen following the surge in interest as a result of the endorsement.
The whales (traders with a lot of money) start buying large volumes of one of the coins that have low trading volume. Let say that the trading volume is 500 coins per day. The whalse come and start buying the coin, placing a huge buy wall of, for example 400 coins.
Since there is not enough liquidity (not enough people that are willing to sell the coin at that price), whale starts to push the price up with the wall. Other traders are soon aware of the “trending” coin, as it has day-to-day price increase of, let’s say, 50%. This increase in price attracts other investors looking to make a short-term profit and a lot of beginners and people with not enough knowledge about the coin. That way the demand that was fake slowly turns into reality, as more and more people want to buy the coin.
Bancor Protocol, based in Zug, comes with a solution of Smart Tokens. It is a smart solution that allows any cryptocurrency to have a “reserve”, whether in ETH or other currencies. Whenever a user purchases or liquidates a Smart Token™, the actual price is calculated according to the transaction size. The reason for this is that the Bancor protocol uses a specific function which takes into account price changes that would have occurred if the transaction were split into infinitely small pieces.
Liquidating a high percentage of the supply would cause a substantial price decrease (since each incremental liquidation puts downward pressure on the price) and this decrease is taken into account in current transaction pricing. This ensures that the reserve balance will never run out, and that the CRR will always be maintained. This also helps avoid manipulation by large players (by making it much more expensive to do so) that is so common in today’s exchange model.
