Bitcoin

Tell the truth? How cryptocurrency data aggregators act against fake Exchange volumes

These days, cryptocurrency data aggregators are tasked with being the first point of contact for beginners entering the area and providing up-to-date information to experienced users. While the COVID-19 pandemic has caused a global economic crisis, the cryptocurrency industry is booming. Before that, skeptical investors began testing the water, and data providers are keen to make a lasting impression.

Market data aggregators, or data providers, are platforms that bring together data from various exchanges to present users with data on trading volume, historical asset prices, and market capitalization. These platforms usually offer their own APIs for data distribution to blockchain projects and financial media, as well as their standard web interface and mobile application.

From exit scams to pump-and-dump programs, the crypto community is no stranger to fraudulent activity. However, what appears to be an obvious scam to seasoned crypto investors may not seem so to a newbie. Smart investments require smart data. That’s why data aggregators do their best to provide users with the best possible data.

The volumes of the wrong volumes

Tell the truth? How cryptocurrency data aggregators act against fake Exchange volumes
Tell the truth? How cryptocurrency data aggregators act against fake Exchange volumes

Although the methods varied depending on the data source, the daily trading volume has been the main measure for ranking exchanges in recent years. Back then it was reasonably intuitive: higher volume exchanges have more active traders, and more active trading creates more liquidity.

The problem became apparent when Bitwise Asset Management published an analysis in March 2019 detailing how 95% of the volumes reported by Bitcoin exchanges on CoinMarketCap were allegedly fake. After developing an infrastructure to read data directly through the trading interface of 81 exchanges, Bitwise discovered inconsistencies with the volumes reported by many exchange APIs.

According to the report, the exchanges had misreported their volumes to CMC, giving the public the wrong impression of the size of the Bitcoin market. The exchanges have increased their volume in order to rank higher on the lists and to attract users to their platforms. The report also argued that the actual market for Bitcoin (BTC) is much more organized and regulated than previously thought.

CoinMarketCap’s chief research officer told Cointelegraph that the exchange appears to be exploiting CMC, according to Gerald Chee. Since the Bitwise report was published, CMC has launched its Alliance for Data Responsibility and Transparency, Alianza de Responsabilidad and Transparencia de Datos, in Spanish to promote an ethical and open environment between exchanges, and has released several new ranking algorithms that aim to provide accurate data independently on the volume of misinformation from the exchange.

Although Bitwise’s report covered the BTC / USD and BTC / USDT trading pairs, other markets in the area were not examined. However, the data analytics companies were already busy. A detection Run by data analytics firm The Tie in March 2019, the firm said that 86.57% of reported cryptocurrency trading volume looked suspicious and that 75% of exchanges were experiencing unusual volumes and questionable activity. In addition, in the same year, Alameda Research published a report claiming that exchanges falsified 70% of all data on the volume of cryptocurrencies traded on aggregation platforms.

When exchange ranking sites are volume dependent, trading platforms are encouraged to increase volume. If both trade volume requirements apply to new project lists, teams are encouraged to submit their numbers in order to be included on the lists.

It is important that a project is listed on a top notch market aggregator as this will help increase the user base and provide greater exposure and access to investors with more capital. As a result, some projects are subject to the requirements of large data providers and spoofed volumes to secure lists.

New metrics, same mistakes?

Several data aggregators have come under fire this year. Most data providers used swap volumes for their classification calculations and quickly switched to more accurate models. CoinGecko implemented a Trust Score to combat fake volumes by adding web traffic, bid and ask margins, and cost-of-depth metrics to the equation.

In April, Nomics added a currency transparency index to its ranking system and later, in May, the transparent market capitalization and transparent volume metrics, which make up the market capitalization and volume of all exchange-traded currencies. with an A + transparency index on the platform.

In November, CoinMarketCap announced its new liquidity metric, a system designed from the ground up to scan data from exchanges for both volume distribution and order book depth. Bitwise’s report detailed some of the practices used by exchanges to forge their declared volumes, and CMC’s solution seemed to take these factors into account.

In response to the evidence of spoofed volumes, Messari also implemented changes to its OnChainFX sorting algorithm. While the 10 actual volume metrics attempt to list exchanges in order of reliability and trustworthiness, Liquid Market Cap uses volume-weighted pricing in conjunction with Liquid Supply estimates to rank trading platforms based on liquidity.

“”Cryptocurrency data aggregators need to evolve and keep track of the various new data sources that are emerging“CoinGecko co-founder Bobby Ong said in an interview with Cointelegraph. Since May 2019, the platform has consistently expanded its trust score calculations to include variables, the latter assessing the security of the exchange.

While these metrics are designed to ensure the exchanges can’t fake their volumes to improve their rankings, strict parents raise elusive children. It would not be long before exchange and blockchain projects found new ways in these systems.

The way to follow

Cryptocurrency Market Watchdog BTI Verified released a detailed report on the accuracy of data from aggregation platforms in September, indicating that among the top 50 exchanges ranked by CMC, only 32% had excessively high volumes. inflated. Previous reports had set this ratio at 75%, which showed a significant improvement in the overall quality of the data.

When asked about the future of cryptocurrency data aggregators, Ong said it would be interesting because of the “explosion of data that is being generated” in both centralized and decentralized spaces by various blokchains.

Like CoinGecko, Nomics, and Messari, CMC eventually diversified and built on its initial liquidity metric. The liquidity score introduced in May 2020 contains additional information in its ranking algorithm, e.g. B. Exchange web traffic to estimate user base.

While things seem to have improved, aggregator platforms still have a long way to go. In their report, BTI Verified explained how exchanges have multiple ways to scam the systems used by data providers and to play with their ranking algorithms.

“”Each aggregator has a target market that they serve and they create guidelines accordingly. Regarding the differences in the reported volume of these aggregators, we found that each has different needs“said Sumit Gupta, CEO of CoinDCX – an India-based exchange.

A quick search of the internet can reveal how easy it is for an exchange to buy web traffic, and it is much easier than implementing wallets. Liquidity metrics can be tricked with the help of phantom orders: deals that appear in the order books but disappear when placed.

Exchanges that do poorly on one platform appear high on other platforms, indicating that some exchanges have found ways to adjust the data needed to improve their rankings. If better methods are not used, the exchanges will soon find more and more advanced ways to climb the ranks with no actual activity on their platforms.

Projects continue to receive strong incentives to find ways to defraud these systems, be it through bogus volume, liquidity, or web traffic. Data platforms with stringent requirements, such as the need to list a certain number of exchanges, hinder project growth by being pushed to potentially illiquid exchanges and potentially subject to unnecessary volatility.

However, listing on a smaller number of reputable exchanges does not result in a higher ranking, as honest exchanges always report lower volumes than their trading numbers. “”We actually don’t have a solution to the wrong volume problem, at least one that we can apply in the near future.“Nate Tsang, co-founder of CoinFi website for data aggregators for cryptocurrencies, told Cointelegraph.

He noted that the solution was to collect all of the trading data from each exchange and use algorithms to detect the wash trading patterns. “Of course it will be a game of cat and mouse in which the motivated find new ways to cheatTsang added.

Instead of creating metrics to reduce the amount of misinformation, data providers should strive to create better incentive models for projects and exchanges. The guidelines that are most rewarding for projects based on blockchain technology will help accelerate the growth of the industry.

Using real-world statistics like developer engagement, number of employees, and social media tracking, as well as metrics already in use, can help present more robust and accurate data to users. Due to the nature of decentralized networks, the manipulation of price data in a market can have general effects on world market prices, volatility and market sentiment.

Modern solutions to counter bogus volumes include decentralized oracles that collect data from multiple sources and use tokens to encourage data providers to report the truth. Using decentralized oracles might be the way to go, but until the technology provides a reliable service to integrate with enough platforms, the extent of the impact is still unclear.

The current incentives that allow exchanges, data providers, and tokens to use listing algorithms will not be sustainable in the long run. Current listing requirements and valuation mechanisms are detrimental to the growth of small projects and open up opportunities for the most influential actors to manipulate.

This is not a problem that can be assigned to a single system component. Unless aggregators try to devise more sophisticated methods of ensuring data integrity, the crypto industry will only be remembered for its misrepresentation of a technological marvel.

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