These days, cryptocurrency data aggregators are tasked with being the first point of contact for newbies entering the area and providing up-to-date information to experienced users. While the COVID-19 pandemic caused a global economic downturn, the crypto industry is booming. So far, skeptical investors have begun testing the water, and data providers are keen to make a lasting impression.
Market data aggregators, or data providers, are platforms that collect inputs 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 schemes, the cryptocurrency community is no stranger to fraudulent activity. However, what seems like an obvious scam to seasoned crypto investors may not seem like such to a newbie. Smart investments require smart data. Hence, data aggregators do everything possible to provide users with the best possible data.
Volumes of forged volumes
Although the methods used varied across data sources, daily trading volume has been the most important metric for ranking exchanges in recent years. It was reasonably intuitive for the time: 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 from 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 far more organized and regulated than previously thought.
CoinMarketCap’s chief research officer, Gerald Chee, said Cointelegraph said the exchange appears to be exploiting CMC. Since the Bitwise report was published, CMC has launched its Data Accountability & Transparency Alliance to promote an ethical and open environment between exchanges. Also, CMC has released several new ranking algorithms that aim to provide accurate data regardless of whether or not exchange volumes are misreporting.
While the Bitwise report covered the BTC / USD and BTC / USDT exchange pairs, it did not examine other markets in the area. However, data analytics companies were already busy. An investigation by data analytics firm The Tie in March 2019 found that 86.57% of reported cryptocurrency trading volume appeared suspicious and 75% of exchanges had unusual volumes and questionable activity. In addition, in the same year, Alameda Research published a report that found that the exchange falsified 70% of all cryptocurrency volume data on aggregator platforms.
When exchange ranking sites rely on volume, trading platforms are encouraged to increase volume. When new project lists meet both of the trading volume requirements, teams are encouraged to report their numbers to get on the list in the first place.
It is vital that a project is listed on a top notch market aggregator as this will help grow 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 top data providers and fake volumes to secure listings.
New metrics, same mistakes?
Several data aggregators have come under fire this year. Most data providers used exchange volumes in their ranking calculations and quickly switched to more accurate models. CoinGecko implemented a Trust Score to combat fake volumes by adding web traffic, bid / ask spreads, and deep cost metrics to the equation.
Nomics added a ranking transparency rating to its ranking system in April and later added the Transparent Market Cap and Transparent Volume metrics in May, which measure the market capitalization and volume of all coins listed on exchanges with an A + transparency rating assemble the platform.
By November, CoinMarketCap had announced its new liquidity metric, a system designed from the ground up to scan exchange data for both volume distribution and order book depth. Bitwise’s report detailed some of the practices used by exchanges to forge their reported volumes, and CMC’s solution appeared to take these factors into account.
In response to the detection of spoofed volumes, Messari also implemented changes to its OnChainFX ranking algorithm. While the Real 10 Volume metric tries to list exchanges in order of reliability and trustworthiness, the Liquid Market Cap uses volume-weighted prices along with liquid supply estimates to rank trading platforms based on liquidity.
“Crypto data aggregators need to evolve and track 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 added variables to its Trust Score calculations, with the latest evaluating Exchange security.
While these metrics are designed to ensure exchanges can’t fake their volumes to improve their rankings, strict parents raise sneaky kids. It would not be long before exchange and blockchain projects found new ways in these systems.
The road forward
Cryptocurrency market surveillance firm BTI Verified released a detailed report on data accuracy from aggregator platforms in September which found that among the top 50 exchanges rated by CMC, only 32% had inappropriately inflated volumes. Previous reports had set this ratio at 75%, which shows a significant improvement in overall data quality.
When asked about the future of crypto data aggregators, Ong said this was interesting because of the “explosion of data generated” in both centralized and decentralized spaces across different blockchains.
Like CoinGecko, Nomics, and Messari, CMC eventually diversified and built on its original liquidity metric. The liquidity score introduced in May 2020 contains additional information in its ranking algorithm, such as: B. Exchange web traffic to estimate user base.
While things seem to have improved, aggregator platforms still have a long way to go. In its report, BTI Verified explained how exchanges have multiple ways to outsmart the systems used by data providers and play their ranking algorithms.
“Every aggregator has a target market that they serve and they create guidelines accordingly. In terms of the differences in reported volume between these aggregators, we found that everyone has different needs, ”said Sumit Gupta, CEO of CoinDCX – an India-based crypto exchange.
A quick search of the internet can show how easily an exchange can buy web traffic and is far easier than implementing laundry stores. Liquidity measurements can be tricked by using ghost orders: deals that appear in the order books but disappear upon exposure.
Exchanges that do poorly on one platform will show up in the top rankings of other platforms, indicating that some exchanges have found ways to customize the data needed to increase their rankings. If better methods are not implemented, soon the exchanges will find more and more advanced ways to climb the ranks without actual activity on their platforms.
Projects are still very motivated to find ways to defraud these systems, be it through fake volumes, liquidity or web traffic. Data platforms with stringent requirements, such as the need to be listed on a certain number of exchanges, impede the growth of projects by pushing them to potentially illiquid exchanges and potentially exposing the token to unnecessary volatility.
Listing on fewer, more recognized exchanges, however, is not conducive to higher rankings, as honest exchanges always report lower volumes than those tagging their trading numbers. “We actually have no solution to the spoofed volume problem, at least not one that we can implement anytime soon,” Nate Tsang, co-founder of CoinFi website for crypto data aggregators, told Cointelegraph.
He noted that the solution was to collect all of the trading data from each exchange and use algorithms to detect wash trading patterns. “Of course, it becomes a game of cat and mouse, with the motivated enough to find new ways to outsmart the algo,” added Tsang.
Rather than creating metrics to reduce the amount of misreported information, data providers should strive to create better incentive models for projects and exchanges. Policies that are more worthwhile for blockchain-based projects will help accelerate the growth of the industry.
Using real world stats like developer engagement, number of employees and the following social media as well as the metrics already in use can help present more robust and accurate data to users. Due to the nature of decentralized networks, manipulation of price data in a market can have cross-cutting effects on overall prices, volatility and market sentiment.
Modern counterfeit volume solutions include decentralized oracles that collect data from multiple sources and stimulate data providers with tokens for telling the truth. The use of decentralized oracles could be the way forward, but until the technology provides a reliable service to integrate with enough platforms, it is still uncertain how big the impact will be.
The current incentives that enable exchanges, data providers, and tokens to use listing algorithms will not be sustainable in the long run. Today’s listing requirements and ranking mechanisms are detrimental to the growth of small projects and open up opportunities for manipulation by more influential actors.
This is not a problem that can only be assigned to one component of the system. Unless aggregators try to devise more sophisticated methods of ensuring data integrity, the cryptocurrency industry will only ever be remembered for its misrepresentation of a technological marvel.