Today, cryptocurrency data aggregators have the job of being the first point of contact for newbies entering the space and also providing up-to-date information to experienced users. While the COVID-19 pandemic has triggered a global economic downturn, the crypto industry is thriving. Previously, skeptical investors have started testing the waters, and data providers are eager to make a lasting impression.
Market data aggregators, or data providers, are platforms that collect input from various exchanges to provide users with data on trading volume, historical asset prices and market capitalization. These platforms typically provide their own APIs for data distribution to blockchain projects and financial media outlets in addition to 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 veteran crypto investors may not seem like such to a newcomer. Smart investments require smart data, so data aggregators are committed to providing users with the best data possible.
While methodologies varied between different data sources, in recent years, daily trading volume has been the main measure used to rank exchanges. Before that, it was fairly intuitive: higher volume exchanges have more active traders and more active trading means more liquidity.
The problem became apparent when Bitwise Asset Management launched a analysis describing how 95% of the volumes reported by Bitcoin exchanges on CoinMarketCap were supposedly fake. After developing an infrastructure to read data directly from the trading interface of 81 exchanges, Bitwise found inconsistencies with the volumes reported by many exchange APIs.
According to the report, exchanges had misreported their volumes to CMC, giving the public a false impression of the size of the Bitcoin market. Exchanges increased their volumes to rank higher and attract users to their platforms. The report also stated that Bitcoin’s (BTC) the actual market was much more organized and regulated than previously estimated.
According to Gerald Chee, head of research at CoinMarketCap, Cointelegraph said that exchanges appeared to be benefiting from CMC. Since the publication of the Bitwise report, CMC has launched its Data Accountability & Transparency Alliance to promote an ethical and open environment between exchanges, and it has also released several new ranking algorithms that aim to provide accurate data regardless of exchanges that misreport volumes.
While the Bitwise report covered BTC / USD and BTC / USDT exchange pairs, it did not examine other markets in the space. However, data analytics companies were already busy. A research conducted by data analytics firm The Tie in March 2019, claimed that 86.57% of the reported cryptocurrency trading volume appeared suspicious and 75% of exchanges exhibited unusual volumes and questionable activity. Additionally, in the same year, Alameda Research published a report stating that there were exchanges falsify 70% of all cryptocurrency volume data on aggregator platforms.
When exchange ranking sites rely on volumes, trading platforms are incentivized to inflate volumes. When new project listings meet both trading volume conditions, teams are incentivized to over-report their numbers to get on the list at all.
It is crucial for a project to be listed on a leading market aggregator as it helps increase the user base and provides greater exposure and access to investors with more capital. That’s why some projects succumb to the requirements of the best data providers and fake volumes to secure listings.
New statistics, same mistakes?
Various data collectors were under attack this year. Most data providers used exchange volumes in their ranking calculations and quickly switched to more accurate models. CoinGecko has implemented a trust score to combat fake volumes by including web traffic, bid / ask spreads and depth cost metrics.
Nomics added an Exchange Transparency Rating to its rating system in April, and later in May the metrics for transparent market capitalization and transparent volume, which aggregate the market capitalization and volume of all coins listed on exchanges with an A + transparency on the platform.
In November, CoinMarketCap announced its new Liquidity Metric, a system designed from the ground up to scan exchange data for both the volume spread and the depth of the order book. Bitwise’s report had described some of the practices used by exchanges to falsify their reported volumes, and CMC’s solution seemed to take these factors into account.
In response to the evidence of fake volumes, Messari too implemented changes to its OnChainFX ranking algorithm. While the Real 10 Volume metric attempts to list exchanges in order of reliability and reliability, the Liquid Market Cap uses volume-weighted prices along with Liquid Supply estimates to rank trading platforms based on liquidity.
“Crypto data aggregators will have to evolve and keep up with the various new data sources that come to the market,” said Bobby Ong, Co-founder of CoinGecko, in an interview with Cointelegraph. Since May 2019, the platform has consistently added variables to its trust score calculations, the latest to evaluate exchange security.
While these metrics are designed to make sure exchanges can’t falsify their volumes to improve their rankings, strict parents are raising sneaky kids. It wouldn’t be long before exchanges and blockchain projects would also find new ways around these systems.
The way forward
BTI Verified for cryptocurrency market surveillance published a detailed report in September on the data accuracy of aggregator platforms, suggesting that of the top 50 exchanges ranked by CMC, only 32% presented unreasonably inflated volumes. In previous reports, this ratio was set at 75%, showing a marked improvement in overall data quality.
When asked about the future of crypto data aggregators, Ong said it would be interesting because of the “explosion of data being generated” in both centralized and decentralized spaces across blockchains.
Like CoinGecko, Nomics and Messari, CMC eventually diversified and built on its initial liquidity metric. The liquidity score, introduced in May 2020, includes additional information in the ranking algorithm, such as the exchange’s web traffic, to estimate the 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 trick the systems used by data providers and play their ranking algorithms.
“Every aggregator has a target market they respond to, and they draw up guidelines based on that. As for the differences in the reported volume between these aggregators, what we have come across is that they all have different requirements, ”said Sumit Gupta, CEO of CoinDCX – an India-based crypto exchange.
A quick web search can reveal how easily a stock exchange can buy web traffic, and it’s much easier than implementing wash trades. Liquidity measurements can be tricked with ghost orders – transactions that appear in order books but disappear when enabled.
Exchanges that score poorly on one platform appear in the top rankings of others, indicating that some exchanges have found ways to adjust the data needed to improve their rankings. Unless better methodologies are implemented, exchanges will soon find increasingly sophisticated ways to move up the ladder without any actual activity on their platforms.
Projects are still strongly incentivized to find ways to defraud these systems, be it fake volumes, liquidity or web traffic. Data platforms with strict requirements, such as the need to be listed on a certain number of exchanges, hinder the growth of projects by pushing them towards potentially illiquid exchanges and potentially exposing the token to unnecessary volatility.
However, a listing on fewer, more recognized exchanges is not conducive to a higher ranking, as fair exchanges will always report lower volumes than those marking their trading numbers. “We don’t actually have a solution to the fake volume problem, at least not one that we can implement anytime soon,” Nate Tsang, co-founder of crypto data aggregator website CoinFi, told Cointelegraph.
He noted that the solution was to collect all the trading data from each exchange and use algorithms to detect wash trading patterns. “It will of course be a game of cat and mouse where people who are motivated enough will find new ways to deceive the algo,” added Tsang.
Rather than creating metrics to reduce the amount of misreported information, data providers should strive for better incentive models for projects and exchanges. Guidelines that are more rewarding for blockchain-based projects will help accelerate industry growth.
Using real-world metrics such as developer engagement, number of employees, and social media following along with 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 one market can have overarching effects on overall prices, volatility and market sentiment.
Modern solutions that can combat fake volumes include decentralized oracles, which collect data from multiple sources and incentivize data providers with tokens to report the truth. The use of decentralized oracles could be the way forward, but until the technology can provide reliable service to integrate with enough platforms, the magnitude of the impact they will have is still uncertain.
The current incentives through which exchanges, data providers and tokens can take advantage of listing algorithms will be unsustainable in the long run. Current listing requirements and ranking mechanisms are detrimental to the growth of small projects and open up opportunities for manipulation by more influential players.
This is not a problem that can be attributed to just one part of the system. Unless aggregators try to create more sophisticated ways to ensure data integrity, the cryptocurrency industry will only be remembered for the false presentation of a technological marvel.