CoinGecko reveals Trust Score 2.0 to fight fake cryptocurrency volume

Fake cryptocurrency trading volume is deceptively multi-faceted, so fighting it requires more holistic exchange metrics.

Fake trading volume is the most open secret in cryptocurrency, with estimates of fake volume ranging from about 90% to 95%.

But knowing is only half the battle.

In the absence of centralised market controls and a tight global regulatory framework, there's little to be done to actually prevent fake volume on exchanges. So in true cryptocurrency fashion, the solution has to come from the community.

Once you know where the real trading volume is, the theory goes, it's easier to find the real market among the noise. This puts trading information sites such as CoinMarketCap, LiveCoinWatch, CoinLib, Messari and CoinGecko at the centre of these efforts.

So, the problem which lands on the shoulders of these kinds of sites is to devise a system for identifying real trading volume in a scalable way.

Myriad causes

There's no perfect answer. One of the problems is that there are several different reasons an exchange would have fake volume.

Consider BitMax, said CoinGecko co-founder Bobby Ong at the Invest: Asia 2019 conference. It supposedly has about 14 times more trading volume than Binance, if you believe its self-reported metrics.

"Is it really the case that they're 14 times more liquid than Binance?" he asks, quite rhetorically.

Its problem is a so-called "trans fee mining system" where traders can earn the exchange's native token from making trades, which compensates any trading fee incurred.

This system is not necessarily bad in itself, in that it's a useful way of rewarding users, but a large volume of wash trading is an unfortunate side effect.

In this way, having a reliable system to allow these kinds of mechanisms while also recognising the real volume among the fake, can be especially useful.

But trans fee mining encourages trading fee bots to essentially "mine" exchange tokens, Ong explained.

"Reported trade volume is no longer a good indicator... there's so much noise there we need to find an alternate data point... what we really want is a trading volume proxy."

There are a lot of different reasons an exchange would have fake volume, which is also one of the reasons it's so difficult to find a solution."

Taking different approaches

There are several different methods from different data sites.

For example, CoinMarketCap has a system which simply sifts out the exchanges that allow zero fee trading. It's a bit ham-fisted.

Meanwhile, the "Messari real 10" is based on a commonly accepted list of legitimate exchanges, compiled by the Blockchain Transparency Institute, which matches trading volume with website traffic scores (provided by Alexa, which is another problem in its own right), but there are criticisms that even some of the supposedly clean exchanges have fake volume issues of their own.

And it doesn't help that wash traders who want to evade detection are getting increasingly sophisticated, by changing up their bot trading patterns in an arms race-type effect.

Elsewhere, independent researchers have gotten straight to the point by analysing real vs expected slippage from trades on various exchanges. Experiencing unexpected slippage and unexpectedly poor liquidity is, after all, the main reason this is genuinely a problem for exchange users.

In the absence of any single universal truth, fighting fake volume has to be an incremental team effort.

A new weapon against fake volume

The motivations for wash trading in cryptocurrency are often quite different from the motivations for wash trading in traditional markets. In crypto, it's not always about pumping penny stocks, it's not always the exchange's fault for allowing it, and the perpetrators may not necessarily have any especially malicious motives at all.

The complexity of the situation calls for a much more multifaceted approach than has previously been employed, which is why CoinGecko's addition to these efforts may be a significant addition.

It's called Trust Score 2.0, and it aims to paint a holistic picture of exchange reputability to better capture the full shape of the problem.

The first Trust Score was unveiled in May 2019, based on a combination of web traffic analysis and order book analysis.

But the newly revealed Trust Score 2.0 goes beyond liquidity measurements, and also incorporates:

• Exchange API technical coverage
• Exchange scale of operations
• Exchange estimated reserves
• Exchange regulatory compliance

It's worth noting that some of this information, such as exchange estimated reserves, isn't exactly easy to get, especially when you don't want to trust the self-reported exchange reserves.

That particular metric comes from a partnership with Bitfury's Crystal Blockchain system, while the regulatory compliance information comes from Coinfirm.

Because, as previously mentioned, fighting fake volume is a team effort.

So far the reserve estimates are only for Bitcoin, Ethereum and Bitcoin Cash wallet reserves, but there are plans for other tokens in the future, and Trust Score 2.0 is now live on CoinGecko.

“As one of the world’s largest cryptocurrency data aggregators, it is our duty to provide critical
and actionable data to our users," said TM Lee, co-founder of CoinGecko. "With the launch of Trust Score 2.0, progress is being made to promote transparency amongst cryptocurrency exchanges."

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Disclosure: The author holds BNB, BTC at the time of writing.

Picture: Shutterstock