The Rising Threat of Pump-and-Dump Schemes in DeFi and Their Impact on Institutional Exposure

The decentralized finance (DeFi) ecosystem, once hailed as a democratizing force in global markets, has become a hotbed for coordinated pump-and-dump schemes orchestrated through Telegram groups and bot-driven manipulation. These schemes exploit the permissionless nature of DeFi protocols, leveraging low-liquidity tokens and algorithmic tools to orchestrate artificial price surges followed by catastrophic collapses. For institutional investors, the risks are no longer theoretical: in 2025, Solana's DeFi platforms like Raydium and Pump.fun have seen over 93% of liquidity pools and 98.7% of tokens flagged for fraudulent activity, including rug pulls and flash pumps. This article examines how these schemes operate at scale, their financial toll on both retail and institutional actors, and the growing regulatory and technological responses to mitigate their impact.

The Mechanics of DeFi Pump-and-Dump Schemes

Pump-and-dump schemes in DeFi rely on three key elements: Telegram coordination, bot-driven hype, and low-liquidity tokens. Large Telegram groups-some exceeding two million members-sell premium access to insider information about target coins, creating a feedback loop of artificial demand. Bots amplify this effect by flooding social media channels with promotional messages, often within minutes of a price spike. Once the price peaks, organizers liquidate their holdings, leaving latecomers with worthless assets.

The use of AI-powered trading bots has further exacerbated the problem. These tools can execute trades at machine speed, inflating prices during "flash pumps" that last mere minutes before collapsing. For instance, in 2024, suspected wash trading linked to bot-driven manipulation reached $704 million across Ethereum, BNB Smart Chain, and Base. By 2025, machine learning models have improved detection rates, but the schemes remain elusive due to their rapid execution and pseudonymous nature.

Solana's DeFi Ecosystem: A Case Study in Vulnerability

Solana has emerged as a prime target for these schemes, with platforms like Pump.fun and Raydium dominating the scene. Pump.fun, a token-launch platform, generated over $500 million in fees in 2025 by enabling the creation of nearly 8 million tokens. However, 98.7% of these tokens collapsed into worthless pump-and-dump schemes shortly after launch. Similarly, 93% of Raydium's liquidity pools exhibited soft rug-pull characteristics, with median losses of $2,832 and a single incident reaching $1.9 million.

Two high-profile rug pulls in early 2025-the LIBRA ($286 million in losses) and MELANIA ($200 million in losses) incidents-highlighted the systemic risks. These events were not isolated: Solana's DeFi ecosystem saw daily trading volumes on Raydium surge to $3.6 billion in Q1 2025, but the volatility of speculative assets created a fragile environment.

Institutional Exposure and the Hedge Fund Dilemma

While institutional investors have cautiously entered DeFi, their exposure remains concentrated in crypto-native entities and hedge funds. By 2025, 55% of traditional hedge funds reported digital asset allocations, though these typically account for less than 2% of assets under management. Despite this, the sector's risks are acute. In October 2025, systematic hedge funds faced their worst performance in nearly two years, with daily losses averaging 1.8% over four trading days. These losses were attributed to crowded positions in speculative assets like memecoins, which are heavily influenced by Pump.fun's token dynamics.

Institutions are not passive victims. Over 57% have adopted advanced trading surveillance systems to detect manipulation, including pump-and-dump schemes. Yet, the speed and scale of bot-driven attacks-such as flash pumps-often outpace human oversight. Regulatory bodies like the SEC and CFTC have intensified scrutiny, pushing DeFi projects to adopt KYC/AML protocols and smart contract transparency. However, enforcement remains challenging in permissionless markets where anonymity is a core feature.

The Path Forward: Mitigation and Regulation

The rise of pump-and-dump schemes underscores a critical tension in DeFi: the promise of open access versus the reality of market manipulation. For institutions, the solution lies in a dual approach: technological innovation and regulatory clarity. Machine learning models, while imperfect, offer real-time detection of suspicious patterns. Meanwhile, regulators must balance innovation with investor protection, as seen in the U.S. with the SEC's focus on smart contract compliance.

For individual investors, the lesson is stark: low-liquidity tokens and Telegram-driven hype are red flags. As one researcher noted, "The DeFi space is a high-stakes lottery, and the house always wins." For institutions, the stakes are even higher. The LIBRA and MELANIA rug pulls serve as cautionary tales, illustrating how even sophisticated investors can be blindsided by the speed and coordination of modern pump-and-dump operations.

Conclusion

DeFi's permissionless ethos has enabled unprecedented innovation, but it has also created fertile ground for exploitation. As Telegram rings and AI bots refine their tactics, the financial toll on both retail and institutional investors will only grow. While regulatory and technological defenses are improving, the scale of the threat demands vigilance. For institutions, the key takeaway is clear: in a market where $1.9 million rug pulls are routine, caution-and robust monitoring-is not optional.