The whole crypto community recently saw a tremendous success of some newcomers on the crypto exchange market. BitForex, Bittrex, FCoin, and CoinEx and these managed to break into the CoinMarketCap list of Top 10 exchanges by daily trade volume. All these exchanges are centralized. Similarly, Changpeng Zhao, the CEO of the biggest centralized cryptocurrency exchange Binance, shared his finding of analyzing the fake volumes created by these new but leading trading platforms, which explicitly described the dark hat methods employed by rookies to inflate their volumes.
decentralized crypto exchanges are capable of competing against centralized trading platforms and eliminate fake volumes from the global market. Sasha Ivanov, CEO Vostok
But the question is how?
Researchers at CER, a cryptocurrency research group, investigated BitForex, FCoin, and CoinEx, three trading platforms that managed to climb up the rankings to become top 10 cryptocurrency exchanges within months since their debut, evaluating their business models and volumes.
The issue of fake volumes on crypto exchanges is like a UFO, some people claim to witness it but there is no evidence and metrics to prove its existence. Finally, thanks to Crypto Exchange Ranks, it seems that we eventually get the scent.
CER researchers explored the three trading platform’s social media engagement, website traffic, and overall demand, comparing them to Kraken and UPBit, the industry’s most trusted cryptocurrency exchanges. These researchers discovered that the three digital asset exchanges lacked active users, traffic, and social media engagement, and the level of activity on the exchange was not sufficient to justify their unrealistically large volume.
Considering the analysis results, it’s evident that BitForex is likely pumping its trade volume using wash trade, the most common means available. While it can be carried out in different ways, wash trade typically uses large transactions/trading orders to reduce the risk of loss. This practice is consistent with the analysis results that we’ve received and served as additional proof of BitForex’s volume manipulation activit. On centralized exchanges, it is cheap, simple, and easy to initiate wash trade and bot trading in an attempt to bulk up volumes. More to that, because centralized exchanges are operated by a central authority, their numbers, businesses models, revenues, and operations are all opaque to the public.
Of course, there is this problem of fake volumes. Exchanges are trying to inflate their volumes through imitating their natural volumes, mostly for marketing purposes. This probably has to be solved in the same way it has been solved in traditional markets, there has to be some regulation and control over exchanges.Vostok CEO Sasha Ivanov
Consequently, over the past year, investors in the cryptocurrency market have anticipated the development of sophisticated decentralized exchanges that are fairer and more transparent than centralized exchanges. In concept, decentralized exchanges have an edge over centralized platforms in every imaginable aspect; security, transparency, and liquidity. As Coinbase co-founder and former Goldman Sachs executive Fred Ehrsam explained, “because decentralized exchanges can share a pool of liquidity on exchange protocols, they can have significantly more liquidity than centralized platforms”.
However, one key limitation of decentralized platforms that has restricted their adoption is user experience. Unlike centralized trading platforms, all data requests have to be processed through a public blockchain network, through the utilization of smart contracts. Many decentralized exchanges and exchange protocols such as Ethereum creator Vitalik Buterin-advised Kyber Network, AirSwap, 0x, and Waves have focused on developing seamless user experience through scaling, and in the near future, Ivanov said that decentralized exchanges will be able to compete against centralized platforms.
Decentralized exchanges are going to become more and more important, and it will be much more easier to filter out fake volumes in a decentralized setting. Because basically, everyone can see all the trades and it is quite to see if some trades are suspicious.