Market manipulation or coincidence?
157 – On November 17, the Yearn Finance (YFI) token suffered a 40% drop in price, from a value of USD $14,200 to USD $9,000. This drop occurred after evidencing liquidations of the token for a value of USD $4.5 million, being this the fundamental factor of the “panic sell” evidenced.
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Early indications show that the drop may be tied to market manipulation by the company itself. An article, published by Crypto City Press, claims that Yearn Finance sold large quantities of YFI on the open market with the aim of causing the price to fall; this would have allowed the company to buy YFI at a lower price and increase its profits.
Although the company has denied these accusations, as the hours go by, the rumor is gaining strength due to the fact that the decentralized exchange dYdX had to use 9 million dollars from the company’s insurance fund to fill the liquidity gap left by Yearn Finance. According to its founder, Antonio Juliano, this was a coordinated attack on the exchange.
The allegation of market manipulation has caused great concern in the DeFi community, as DeFi is based on a decentralized ecosystem that relies on the trust of users. If it is proven that Yearn Finance manipulated the market, it could damage trust in DeFi as a whole.
Low blow for DeFi
The YFI crash has highlighted the risks that exist in DeFi, as DeFi is a relatively new ecosystem and is not yet formally regulated; this means that it is more vulnerable to market manipulation and other types of fraud. Generally, DeFi projects are born very small and over time become benchmarks.
Although the money used in the Yearn Finance operation does not represent a major weight in comparison to the total amount traded in the Peer-To-Peer markets, its impact does. This is due to the fact that being a “low liquidity” project, any movement or minimum speculation around it can translate into a significant increase, either downward or upward.
The collapse of YFI has also highlighted the importance of transparency in DeFi; users must be able to trust that DeFi companies are acting ethically and transparently. The reasons behind the collapse of the protocol are yet to be known, but in the first instance the damage has already been done.
DeFi has the potential to revolutionize the financial world. However, it is important that the ecosystem develops in a responsible and safe way, so DeFi companies must take measures to protect users and avoid this type of situation. These types of cases are evidence of why the conflict between the SEC and cryptocurrencies.
In case it is proven that there was market manipulation by the company itself it could be fined by regulatory authorities. The U.S. Securities and Exchange Commission (SEC) has already shown its interest in regulating cryptocurrencies, and could take action against YFI if it is proven that it violated securities laws, which is an extremely serious offense and carries great risks for the managers.
The project was founded with the purpose of offering returns through cryptocurrencies by means of multiple investment strategies such as yield farming, staking and lending. All this could end up in lawsuits against the company and the people in charge of the manipulation.
They should be presumed innocent until proven guilty, but at the moment the indications of guilt are very strong. That is why DeFi projects should be treated with great care, because although they represent a great opportunity for growth, they carry great risks.
Writter: franco Rubeis