- The ability to withdraw blocked Ether created the concept of a risk-free rate
- This, in turn, makes it possible to determine irrational behavior in the market using patterns.
- Such trading may indicate attempts to launder funds from illegal activities.
In mid-April, a large-scale update was deployed on the Ethereum network – Shapella (Shanghai / Capella). At the same time, ETH stake holders were given the opportunity to withdraw their funds. Some analysts believe that this will make it much more effective to identify cybercriminals who are trying to launder “dirty” money.
This opinion was shared by an expert Cointelegraph Debanjan Chatterjee. In his article, he proposes using patterns of irrational staker behavior to identify illegal activity.
Profitability as the main motive of traders and the difference between TradFi and DeFi
Chatterjee believes that it is the potential return on investment that is the main pillar of the traditional financial market. An increase or decrease in returns leads to an increase or decrease in perceived risk.
Thus, a change in the Fed’s interest rate serves as the main rationale for an investment decision. Movement against the market is perceived as irrational behavior, indicating other motives of the trader, for example, the desire to “launder” money.
This process can be broken down into several steps:
- placement of “dirty” money in the financial system;
- moving funds in order to hide their connection with the crime;
- integration of fully legal receipts into the financial system.
And if in TradFi analysts study the movement of capital, then in DeFi – an object, that is, a wallet involved in the money laundering scheme.
Chatterjee proposes to look for criminals at the stage of transferring funds. How can Shapella help in this case?
Risk reward as a marker of irrational behavior
The idea of the analyst is to form patterns of behavior – at what reward the trader agrees to take the appropriate risk. The model will allow you to track those investors who behave strangely.
What is meant by this? High-risk behavior with potential returns below the zero-risk rate. Why Ethereum? Because this product provides reference interest rates for the cryptocurrency sector.
Chatterjee proposes to base the model on the potential income from ETH staking. This will be a zero risk bet. Behavior in which a trader earns less but still trades is an example of irrational market action.
And then Shapella? The update allowed to display previously blocked broadcast. This means that the product has become more open to traders. Therefore, now it makes no sense to conduct high-risk trading, having the opportunity to receive, albeit low, but passive income.