Pi Network frowns upon pumps-and-dumps

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Author: juggernaut

August 24, 2021

Pi is not susceptible to pumps and dumps. That’s what the whitepaper clearly said. It is then plausible that the Pi Development Team has been putting in place the necessary protocols and mechanisms that protect Pi from manipulation, FUDs, and paper hands.

A pump and dump scheme is “a type of fraud in which the offenders accumulate a commodity over a period, then artificially inflate the price through means of spreading misinformation (pumping), before selling off what they bought to unsuspecting buyers at the higher price (dumping). Since the price was inflated artificially, the price usually drops, leaving buyers who bought on the strength of the false information at a loss.” (Josh Kamps, Bennett Kleinberg / 26 November 2018)

In other words, it is a form of market and price manipulation. It can happen when a person, a group of people, or entities deliberately or subconsciously buy a huge amount of a certain cryptocurrency to drive up its value and then sell off everything when a target price is reached. That translates into profits. When this happens, the paper hands will follow suit once they see the market price of the coin jumps up. The same paper hands will dump their coins when they see sudden downtrends in the price chart.

There are certain groups on Reddit and Discord (Read: https://theoutline.com/post/3074/inside-the-group-chats-where-people-pump-and-dump-cryptocurrency) that are comprised of organizers and participants alike who perform deliberate pumps and dumps. They usually announce to all members of their group information such as the name of the target coin, the target exchange, and the day and time their “attack” will take place.

The result of these illegal and unethical actions can be seen as a sharp spike in a coin’s price chart. Below is an example:

Source: https://cryptopotato.com/new-study-reveals-4818-crypto-pump-and-dump-schemes-recorded-in-just-6-months/

According to the paper entitled “The Anatomy of a Cryptocurrency Pump-and-Dump Scheme” by Jiahua Xu and Benjamin Livshits (Source: https://www.usenix.org/system/files/sec19-xu-jiahua_0.pdf), a typical pump-and-dump process includes:

  1.  Set-up. According to Xu and Livshits, the organizer “creates a publicly accessible group or channel, and recruits as many group members or channel subscribers as possible by advertising and posting invitation links on major forums such as Bitcointalk, Steemit, and Reedit.” Lately, Discord has also been used by these organizers. Telegram channels, the authors continued, “only allow subscribers to receive messages from the channel admin, but not post discussions in the channel.” They also said that in a Telegram group, members can “post messages by default, but this function is usually disabled by the group admin to prohibit member’s interference.”
  2. Pre-pump announcement. Xu and Livshits stated that, at this stage, the group is “ready to pump once it obtains enough members (typically above 1,000). The pump organizer, who is now the group or channel admin, announces details of the next pump a few days ahead. The authors continued by saying that “the admins broadcast the exact time and date of the announcement of a coin which would then precipitate a pump of that coin. Xu and Livshits went on to say that other information, such as the name of the exchange where the pump will take place and the pairing coin is also disclosed in advance.
  3. Pump. During the pump time, the name of the coin is revealed typically in a format of an OCR-proof image to block machine reading. OCR means optical character recognition. Right after this, the admin instructs the group members to buy and hold the coin in order to inflate the coin price. According to Xu and Livshits, the coin price surges during the first minute of the pump, sometimes increasing several times.
  4. Dump. From a few seconds to a few minutes after the pump starts, the coin price will reach its peak and, in many cases, it is an all-time high. Xu and Livshits explained that “as soon as the first fall in price appears, pump-and-dump participants start to panic-sell.” While the price might recover by the second wave of buyers who buy the dip, especially those who are not members of the group and are not aware of the situation, the authors said that the chances are “the price will rapidly bounce back to the start price, sometimes even lower.”
  5. Post-pump review. Within half an hour or so, after the price and volume go back to the pre-pump levels, Xu and Livshits said that “the admin posts a review on coin price change, which typically includes the start price and the peak price – and touts how much the coin price was increased by the pump.

How can Pi be protected from price manipulation?

The fact that the Pi Core Team explicitly said that Pi is “not another pump-and-dump” coin means that preventive measures are in place to protect Pi at all costs. But how can Pi be really protected from these fraudulent groups of people?

To answer that, we first review the reasons why a cryptocurrency is prone to it.

One, people can lay their hands on the circulating supply freely. It means that one person can buy as many coins as he can at any given time and then can freely sell everything all at once.

Two, no corresponding protocols are put in place by the coin’s developers to protect the coin from being attacked.

Three, the existence of social networking sites where people can gather and discuss topics without being monitored or controlled paves a prolific way for organizers to initiate malicious coin price manipulations.

It can be virtually impossible to address Number Three, but the Pi Core Team must have been aware of these factors for them to say that Pi is not prone to this kind of attack. And consequently, they must have addressed these issues to prevent Pi from becoming a victim. While it is not clear how the Core Team will execute this, there are ways that are known to protect a coin from pump-and-dump schemes.

These are the following:

  1. Not all coins of one person can be released, withdrawn, exchanged, or swapped at the same time. It means the blockchain algorithm may allow a person to withdraw only some of the coins at a given time.  For example, if a miner owns 1,000 coins, the mining app can let him withdraw only 100 coins every month. This way, the total number of coins released into the market and made available for trading remains limited.
  2. Staking is required. There are some cryptocurrencies in the market today that require investors to stake their coins. It is similar to the traditional time deposits in banks where money is stored and let grow in value over a specific period. Once staked, the coin may not be withdrawn, swapped, or sold. The same applies to mining apps. Eagle Network is one example (Source:   https://eaglenetwork.app/).
  3. There is a lock-in period taking place. Some cryptocurrencies are designed so that the earned coins or tokens through rewards are locked for a certain period (example: 1 year). They remain unusable until they reach maturity. When the lock-in period expires, the tokens/coins are released on a “first in – first out” basis.  It means that the coins earned on the first day of mining will be the first to become available on the first day of release. Through this, the person who owns the cryptocurrency can only sell, swap, or send portions of the total number at a time. One example of this is the Hi Dollars (Source:https://hi.com/).
  4. The coin may be used to buy and sell in a specific marketplace sponsored or created by the coin developers, but these coins cannot be used for other purposes for a specific period. Through this, the cryptocurrency cannot be bought and sold by investors from the exchange platforms like Binance and Coinbase even if the said cryptocurrency is already being used to buy goods and traded on exchange websites.

It is not clear which of these methods are being adapted by the Core Team or if they are using entirely different protocols. They may either inform the public or remain tight-lipped about this to protect Pi from the fraudsters.

In your opinion, which methods are used or should be used by the Pi Core Team to protect Pi?

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