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What is Anti-Dump/Anti-Dumping Policy in Crypto?
Anti-dumping policies in crypto refer to rules coded into cryptocurrency smart contracts to protect token holders from pump-and-dump scams.
The definition of crypto anti-dumping policies differs from anti-dumping policies imposed by governments. The latter refers to protectionist taxes a government imposes on foreign imports to protect the domestic economy.
Understanding Pump-and-Dump Schemes
The pump-and-dump scheme is a fairly simple and common scam prevalent in traditional finance and cryptocurrency markets.
Pump-and-dump scams depend on fear of missing out (FOMO), hype, misinformation, and market manipulation to create a buying frenzy that “pumps” the price of a cryptocurrency.
The fraudster will even purchase large amounts of crypto to artificially increase its market price. As the buying frenzy ensues, the fraudster “dumps” their tokens at a high price, meanwhile, unsuspecting investors are left with irrecoverable losses.
In the crypto world, the pump-and-dump fraudster is usually a crypto whale. A crypto whale is an individual or entity that holds a substantial percentage of a token’s supply. Whales own enough cryptocurrency to influence market prices.
How do Anti-Dumping Policies Work?
Smart contracts are the backbone of the decentralized finance (DeFi) industry. The power of smart contracts allows developers to create environments where a program automatically executes predefined actions when certain conditions are met.
The transparency and automation provided by smart contracts make it an ideal tool to use for anti-dumping policies. Let’s look at examples of anti-dumping policies implemented in different crypto projects.
Token Vesting
Token vesting in cryptocurrencies refers to the process where newly created or newly purchased tokens are locked and only released after a certain time. Typically, the crypto tokens of a project’s founding team and early investors are vested over a period of time. This means that the vested tokens cannot be sold before a set date.
Token vesting ensures that the founding team and early investors cannot abandon the project and dump their tokens in the market. The vesting timetable is made publicly accessible to allow token investors to prepare accordingly.
Buybacks
Buyback is a process prevalent in traditional finance where a publicly-listed company repurchases its stock from the open market in order to reduce the number of shares in the open market and to support its stock price.
Similarly, a promoter or a decentralized autonomous organization (DAO) can buyback its tokens from the open market to support the price of its token.
However, token buybacks alone are ineffective in preventing pump-and-dump schemes. Some projects use token buybacks injunction with innovative crypto tokenomics to protect token prices from market crashes.
In 2022, we saw DAO tokens emerge that funneled a certain percentage of tokens to the DAO treasury each time a market participant bought or sold such tokens. The treasury funds were then used to buyback these tokens, which supported its price during market crashes.
Buying and Selling Restrictions
Developers can add buying/selling limits and restrictions into the smart contract of a cryptocurrency to protect the token from pump-and-dump scams. There are cryptocurrencies that restrict the daily sale of a certain percentage of the total supply.
Failure of Anti-Dump Policies
Ironically, it was anti-dumping policies that helped pull one of the biggest pump-and-dump scams in crypto history.
Let’s rewind to November 2021 – a time associated with a raging crypto market amid Bitcoin’s rise to a record high of over $69,000. A token called SQUID was themed after a popular Netflix series called Squid Game crashed from a high of $2860 to $0.01 within minutes after the project developers dumped their SQUID tokens in the market.
The developers had coded in an anti-dump mechanism that allowed only selected wallet addresses to sell the token on a Binance Chain decentralized exchange called PancakeSwap.
Not only did the anti-dump mechanism allow the SQUID token price to rise astronomically due to a lack of selling pressure, but it also prevented token holders from cashing out during the market dump.
Therefore, it is important to do your own research (DYOR) before investing in cryptocurrencies that claim to be “anti-dump” or “anti-whale tokens.”
As we mentioned earlier, pump-and-dump schemes rely on misinformation and hype to attract investors. Just because a new token claims to have anti-dump policies does not make it a safe investment. Always read the fine print.
The Bottom Line
Crypto anti-dump policies should not be relied on to prevent pump-and-dump scams. Crypto fraudsters are an intelligent bunch who are usually one step ahead of the unaware investor.
As a crypto ethos of self-custody suggests, market participants must take the responsibility of protecting their capital in their own hands.
Always DYOR. Don’t give into FOMO. Be suspicious of tokens that are too good to be true.
