Crypto Exchange Volume Spamming w/ Rob Paone

This post was last updated on November 11th, 2019 at 08:36 pm

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Table Of Contents

Description
Topics Discussed In This Episode
Links Relevant To This Episode
Quotes
Transcript

Description

My guest today is actually me (Clay Collins).

In this episode, I am interviewed by Rob Paone. Rob is the host of the Crypto Bobby Podcast. He’s also the founder of Proof of Talent, a boutique recruiting firm that helps companies fill positions in the blockchain and cryptocurrency space.

A few months ago, Rob interviewed me for his podcast and I liked the content so much that I asked Rob if I could air a modified version of that conversation here on the Flippening. He generously said yes, so here we are. By the way, this is the second time I’ve been on Rob’s show. You can listen to my first interview with Rob at episode #11.

In this conversation, Rob and I explore:

How and why exchanges spam aggregators like CoinMarketCap
What ticker stuffing is and how it works
Why referring to fake volume as wash trading is an inaccurate description of the problem
Why liquidity providers that are really just providing volume as a service to exchanges and crypto projects are hurting the space
What the crypto data ecosystem needs if it really wants to grow up

Topics Discussed In This Episode

The impact of the BitWise report
What is driving fake volume on exchanges
The difference between exchange spamming, volume spamming, and ticker stuffing
Why fake volume matters and who it impacts the most
How retail traders can protect themselves from fake volume
How Nomics.com is combatting exchange spam with transparency ratings
Why keeping up with spam will be an ongoing battle
How investors are using on-chain data to create better trading strategies

Links Relevant To This Episode

Quotes

“People are referring to it as 'wash trading' and 'toxic activity' and all kinds of sublimated terms but at the end of the day, this is spam.” @claycollins Click To Tweet “For the crypto market to gain wider adoption, I think the lightning network needs to grow. We also need more and better ways to earn interest and borrow against our cryptoassets (preferably in trustless ways).” @claycollins Click To Tweet "Why do exchanges spam aggregator sites like CoinMarketCap? First and foremost they get traffic. A lot of these aggregators link directly to the markets pages for trading pairs so it generates traffic for them." @claycollins Click To Tweet

Transcript

Clay: Welcome to Flippening, the first and original podcast for full time, professional, and institutional crypto investors. I’m your host, Clay Collins. Each week, we discuss the cryptocurrency economy, new investment strategies for maximizing returns, and stories from the frontlines of financial disruption. Go to flippening.com to join our newsletter for cryptocurrency investors and find out just why this podcast is called Flippening.

Clay Collins is the CEO of Nomics. All opinions expressed by Clay and podcast guests are solely their own opinion and do [00:00:30] not reflect the opinion of Nomics or any other company. This podcast is for informational and entertainment purposes only and should not be relied upon as the basis for investment decisions.

My guest today is actually me, your humble host Clay. On this episode, you will hear me interviewed by Rob Paone, the host of The Crypto Bobby Podcast and founder of Proof of Talent, which is a boutique recruiting firm that helps companies fill positions in the blockchain and cryptocurrency space.

[00:01:00] A few months ago, Rob interviewed me for his podcast and I liked the content so much that I asked Rob if I could air a modified version of that conversation here for you today. He generously said yes, so here we are. By the way, this is the second time I’ve been on Rob’s show. See the show notes for links to the previous episode we did together.

Anyway, you’re probably used to me being the one asking the questions. In this episode, we flip the script and I hope you enjoy what happens when the tables are turned. In this conversation, Rob and I discuss, one, how and why [00:01:30] exchanges spam aggregators like CoinMarketCap. Two, what ticker stuffing is and how it works. Three, why referring to fake volume as wash trading is an inaccurate description of the problem. Four, why liquidity providers that are really just providing volume as a service to exchanges and crypto projects are hurting the space. And five, what the crypto data ecosystem needs if it really wants to grow up.

We’ll get right to this episode in just a second, but before we get started, I’d like to pause for a moment to tell you that this episode is brought to you by the good folks at Nexo. Here’s a word from them.

[00:02:00] Nexo is the only lender offering instant crypto credit lines, which let you use digital assets as collateral to get cash in 45 fiat currencies and stablecoins. Nexo is a strategic partner of exchanges, OTC desks, and crypto funds throughout its portfolio of structured financial products. Institutional counterparties can earn up to 8% annually on their idle stablecoins, enter into asset swap agreements, or directly borrow crypto. Individuals can also park their cash and stablecoins in a Nexo interest-earning account and get an annual return of 8%. [00:02:30] What’s more, interest is paid out daily and you can add or withdraw funds at any time. So if you are looking to borrow, lend, or swap digital assets, Nexo is your go-to partner. Definitely explore nexo.io or if you’re an institution, you can reach out to them at institutions@nexo.io

As a side note, I really like this team. I recently had the opportunity to speak to one of their cofounders, Anthony, and just had a really great and inspiring conversation [00:03:00] about the future of crypto backed loans and interest earning accounts. Again, check them out at nexo.io.

This episode is also brought to you by the Nomics API and CSV Data Export Service. If you need an enterprise-grade crypto market data API for your fund, smart contract, or app, or if you need historical CSV dumps of trading data or crypto market cap data from top exchanges or even obscure ones, then consider trying out the Nomics API or our historical data export service. [00:03:30] Our cryptocurrency API enables programmatic access to clean, normalized, and gapless primary source trade data across a number of cryptocurrency exchanges. Instead of having to integrate with multiple exchange APIs of varying quality, you can get everything through one screaming fast fire hose. And if you’d like to order historical cryptocurrency market data as CSV exports from top exchanges, email us at sales@nomics.com.

Okay, back to our regularly scheduled program. Here’s my conversation with Rob Paone. Enjoy. [00:04:00]

Rob: Clay. How have things been in the past? Almost a year since we last chatted?

Clay: Things have been great. We continue to grow in traffic and Alexa rank and I think the consumer side of things has always been fun for us, but our bread and butter is the data business, and that’s been going really well. [00:04:30] We’ve learned a lot more about the needs of high-frequency traders in the space and people using a variety of different strategies.

I think when we came into the space we were so new, nobody knew who we were until the only customers we were getting were people with these really niche, obscure data needs. And because of our dataset and how it works we were able to meet those and it’s nicer to have a little bit of a broader exposure now.

Rob: Awesome. It’s been cool to see you guys continuing growing at Nomics. [00:05:00] I think one of the things that we’ve been talking about lately, it’s been brought to light at least from an industry perspective, I think a lot of people behind the scenes knew it was happening, but one of the big things that really pushed this topic of conversation forward was the Bitwise report that came out that really unveiled the curtains a little bit on what was happening at some of these cryptocurrency exchanges and got the industry talking. Would love to have your take at a high level about what that Bitwise report [00:05:30] was about and just your general thoughts on it.

Clay: Hey, this is Clay cutting in to give you some context about the Bitwise report. On March 19, 2019, Bitwise, which is a crypto asset management firm, filed a report with the U.S. Securities & Exchange Commission (SEC) in hopes of getting their Bitcoin ETF approved. In the report, Bitwise asserted that 95% of exchange volume was fake and only 10 exchanges had “real volume.” This report spread like wildfire throughout crypto Twitter. Okay, back to the show.

[00:06:00] First and foremost, I think this report did so much for the industry and really kind of kicked everyone’s ass, ours included. So, it’s a really positive thing.

They said a couple things that were really interesting. The first thing that they said, which is kind of shocking, is that there were only 10 exchanges that had actual volume. You know, that needs to be qualified a lot. So first off they don’t actually define what actual volume is, but the implication is that there’s only 10 exchanges that don’t have a preponderance of fake volume.

[00:06:30] What do they look at in this Bitwise report? They looked at exchanges that had Bitcoin volume. As far as we know, they were only looking at exchanges with order books, like local Bitcoins wouldn’t count and ShapeShift wouldn’t count because they don’t have centralized order books.

Exchanges with order books, and on those exchanges they looked at exchanges with BTC to Tether [00:07:00] or BTC to USC pairs. They weren’t looking at the entire universe, they weren’t looking at the decentralized exchanges because most of those are just, you know, they just have ERC20 and Ethereum tradings. They just look at these specific Bitcoin markets on centralized exchanges and they only looked at the top 81 exchanges on CoinMarketCap.

There’s a lot of sort of filters on what they looked at, but still the overwhelming evidence here is [00:07:30] that wash trading is rampant, volume as a service is rampant, a lot of these services being provided by liquidity providers or market makers. There’s definitely a seedy underbelly to not only what’s happening on these exchanges, but the world of spam.

The first finding was only 10 out of 81 exchanges had real volume. I question a little bit that there’s just 10. There appears to be a little bit of base 10 bias. Why not 9 or 11? 10 seems kind of convenient. [00:08:00] They reported that on the BTC to Tether and BTC to USC pairs, 95% of the volume was fake. It’s interesting. It’s a cool report. There’s a lot you can learn from the report about how fake volume works, but this rabbit hole goes so much deeper.

Rob: Let’s get a little bit deeper on that. There are maybe only a handful of these 90 exchanges that were looked at that are actually really trading crypto, or BitCoin specifically, [00:08:30] but then I’m sure a lot of that also applies to a vast number of altcoins, maybe even more so than of the altcoins too when you look at it.

How is this taking place? What is going on that is driving this fake volume? I know one thing you mentioned was this like liquidity as a service, these market makers. What is happening on these exchanges that just produces all this fake volume?

Clay: I think the first thing that we need to do when sort of considering what’s happening here is to start using the name spam. People are referring to [00:09:00] wash trading or toxic activity and all kinds of maybe sublimated terms but at the end of the day, this is spam. A lot of what’s happening here is people gaming the system so they can get to the top of the CoinMarketCap rankings.

A couple days ago I was at CoinMarketCap, I was looking at the list of top exchanges, and everyone says it’s like Binance is the top exchange, and I couldn’t see Binance in the top 10. [00:09:30] It looks like they’ve done some things to improve it there, but most of the exchanges that I saw on the exchange rankings were exchanges that I’ve never heard of, or I could call everyone I know and they could call everyone they knew and like nobody has ever placed trades on these exchanges.

Why is this spamming happening? There’s a lot of reasons. When an exchange is at the top of the list, first and foremost they get traffic. So a lot of these aggregators link directly to the markets [00:10:00] pages for trading pairs so it generates traffic for them and in some cases in can become a self fulfilling prophecy. You spam your way to the top of the list, you get more traffic, there’s more liquidity and you start getting more maybe organic trading happening on your platform.

Another reason is when they’re at the top of these lists, they can charge huge listing fees to ICO’s, they can run IEO’s for coins. This is something that we’re seeing a lot more recently where exchanges like Binance [00:10:30] will take a cryptocurrency project, will handle the public offering and charge a cut. And often they’re making seven figures plus for these types of deals.

There’s a lot that they get out of this when exchanges rank higher on let’s say CoinMarketCap, now they’re on the first page of the exchange index, which means that the link that they get from CoinMarketCap is more valuable from an SEO perspective. There’s so many reasons why they might do this. [00:11:00] Free advertising, there’s a lot going on here.

I was thinking about what this is. At the end of the day, what should this be called? I was like, “I don’t want to call this wash trading or toxic activity.” I was like, “This is exchange spamming,” and there’s a subset of exchange spamming called volume spamming, and there’s a subset of volume spamming that I’m calling ticker stuffing.

For those of you who don’t know what a ticker is, a ticker is just kind of like a shitty candle. Most what we know is candles [00:11:30] typically have these defined boundaries. But what CoinMarketCap and other aggregators generally ingest, for the most part, are ticker feeds. And tickers are like a 24 hour candle that ends whenever the exchange decides it should end. So it doesn’t end at the end of the day, or on minute boundaries, it just ends whenever it’s computed.

It’s time stamp of computation, open, closed, high, low, and volume. If you get good at this, you can literally [00:12:00] just go in and take that volume number, you’ve got open, close, high, low, volume, and you can just change it. You can just like, add… you can say like, “Hey, whatever the figure is, add a billion dollars,” and send that right over to CoinMarketCap or whoever and just pump up your volume.

The easiest way to do this is ticker stuffing. You’re just shoving volume in that candle. There’s a lot of other ways that it’s done as well, but ticker stuffing is probably the most frequent thing that we see. [00:12:30]

Rob: When I look at this, part of me thinks this is a problem for the industry because a lot of people pull data from CoinMarketCap, so they’ll go and they’ll point to, “Oh wow, the volume for Bitcoin today was 30 billion dollars, volume for whatever was X billion dollars, or million dollars,” and maybe they’ll make some type of decision off of that.

Then part of me thinks, are retail traders or even institutions as well or maybe just “more sophisticated” [00:13:00] traders, are they taking this data from CoinMarketCap and really falling for a lot of this stuff? That’s something you said where maybe it becomes a self fulfilling prophecy where you have FCoin or whatever random exchange basically transaction mining or big volume-ing their way to the top and then they actually get users. Or is this just something where maybe they’re at the top but you’d hope that people are actually looking at this and being like, “Well, I’ve never heard of this exchange once in my life, I’m not going to actually trade there.” [00:13:30]

Clay: What we’ve seen from our institutional customers is they’ve known about this happening for a long time. They’re not believing the volumes, they’re only trading on places that they trust. But I think the average consumer is probably the one that’s suffering here. There’s a lot of ways it can hurt you.

I don’t think this fake volume generally for the higher market cap coins moves the price a ton. It doesn’t look like it moves the price a ton. [00:14:00] As you get further down, this volume can, especially if assets are being priced on a volume weighted basis. But there are a lot of ways that I think retail investors can get screwed.

The first one is that they see all this fake volume and they assume that an exchange has liquidity, right? That they’re going to be able to put forward a significant buy or sell order, maybe if they’re like, “Hey, I was to take X number of dollars from my retirement or X percent or my retirement, I want to put it in Bitcoin,” and they [00:14:30] put through a trade and those order books just aren’t as deep as they look.

I think the second thing is that when you see a top exchange on a place like CoinMarketCap, you might assume that it’s secure. It’s a reputable exchange, it’s a top exchange on this listing. I mean, people have sort of similar assumptions when they go to Google and they search for a loan, right? They assume that Google’s not going to put crap at the top of the list.

I think another aspect [00:15:00] of this is when you’re at the top of the listings, there’s a certain amount of social proof that comes with that, right? If you’re at the top of the listings day, after day, after day, those rankings mean something especially when a site is the top site in the space.

I think that’s mostly how the space is affected, is it’s affecting retail investors and institutions aren’t falling for this crap.

Rob: If I’m a retail trader and I’m new to the space, how do I protect myself from the [00:15:30] issue of fake volume? What do I look out for? Where do I look for data that isn’t plagued with all this nonsense and have wash trading and just fuckery?

Clay: I guess here’s a part where I’m going to shell a bit at Nomics.com/exchanges, we have a list of exchanges with highly transparent data practices. The impetus for this, a lot of other aggregators work in this area, [00:16:00] really comes from the Bitwise reports. When the Bitwise report came out, the first thing that we asked ourselves was what are the good exchanges? What do these 10 good exchanges have in common?

What we noticed is that of the 10 that Bitwise explicitly kind of blesses as being good, of course that’s stuck in time and like the day after the report came out one of them could have become a bad actor, multiple ones could have become bad actors. But, what do these 10 exchanges have in common? [00:16:30] What we found was 8 out of the 10 exchanges that Bitwise blessed provide full trade history. Not only are they providing the highest granularity trade data available, but they’re providing that data available back to the inception of the training pairs on those exchanges.

That’s of course no guarantee that they’re not faking that data, but we kind of think about this like an IRS audit. [00:17:00] If you were being audited by the IRS, you probably wouldn’t want to give them every receipt, you’d want to give them kind of aggregate summary reports on your financials and you would want to give them the least amount of history possible. Something like summary level data for maybe a year or two. If you start giving them receipts and you go back since the very beginning of your spending on all your accounts, [00:17:30] they’re going to find stuff that you didn’t even find. There’s probably going to be things you did that you didn’t report, even if it’s not on purpose.

We found that 8 out of 10 of the good actors are providing this super high quality data. And then when we looked at the exchanges that Bitwise called out as doing a lot of bad things, things that were obviously not good, we found that all of those exchanges, they explicitly called out 16 as doing not great things, but the assumption is all the others are doing bad things, too. [00:18:00] But of the 16 that they called out, 14 of those 16 only provide ticker data with no history. The worst form of data possible with no history, whereas the good actors were high granularity data with full history.

We created our exchange ranking index where we sort first by the transparency of these exchanges, and then we sort by volume. Binance is usually at the top of the list, [00:18:30] Okex is not on the list because they don’t provide a lot of transparency in general. These exchanges are all exchanges you’ve heard of. If you go to our exchange rankings, you’ll see exchanges that you’ve heard of, for the most part. Probably exchanges you’ve made trades on and stuff like Coinbase, Binance, Kracken, Poloniex, Gemini, etc.

Rob: Looking at the ranking right now we have on the top Binance, Bithumb, Coinbase Pro, Kracken, Bitstamp, Poloniex, Ethfinex, Gemini, [00:19:00] Bitflyer, a lot of the ones that people have heard of. And on the bottom we have Mercatox, Coinbene.

Clay: itBit.

Rob: itBit’s interesting with the D, maybe it gets a little bit of that because I think itBit is Paxos and maybe itBit was actually, if I’m remembering correctly, itBit was actually listed in the Bitwise report as one of the 10 trusted exchanges. Is it more of a data issue there with them?

Clay: [00:19:30] I think that’s important to note here. When we put out these rankings, a lot of people came to us and they told us about maybe exchanges that we labeled as a D in terms of transparency but maybe they thought were good actors. And then there are other exchanges that have done things, maybe they had bad customer service or someone had a bad experience that we labeled an A.

We’ve been very clear that this is an exchange transparency ranking. This isn’t an overall, you know, all your business practices grade. [00:20:00]

itBit, we’re actually in conversations with them about their data transparency practices and we expect that within a few months here we’ll be able to get much, much better data from them. We think they’re going to bump up the rankings but yeah, itBit right now only provides ticker data and they don’t provide really any history at all. That’s why they’re there. We have some [00:20:30] obscure exchanges that have an A rating, but they’ve got really fantastic data practices so that’s why they’re there.

If you go to CoinMarketCap right now they’ve cleaned some things up a little bit but you’ve got like Coineal is number four. I have no idea what Coineal is. I really have not even heard of it.

Rob: It’s not real.

Clay: Yeah, I don’t think it’s a real exchange. You’ve got ZBG in there, you’ve got CoinBene was like the [00:21:00] quintessential bad actor in the Bitwise report. If there was a villain in the Bitwise report, it was Coin… sometimes I call it Coin-Bean. Is that CoinBene or Coin-Bean? I have no idea. CoinBene was the villain of the Bitwise report and CoinMarketCap has it as their number nine exchange.

BitWise put out another report, a full white paper where they mentioned that FCoin was the top exchange by volume [00:21:30] on CoinMarketCap in April. Yesterday I was on CoinMarketCap and they had an ad for FCoin, and I was like, “Wow.” And the ad was speaking to their trading volume. It was like, “Wow, we have X number of Bitcoin transactions per day on our exchange according to CoinMarketCap,” and I was like, “This is a huge conflict of interest.”

I think it’s a lot like email spam back in the day. Way, way back in the day people just buy these CDs with email addresses and they would spam everyone [00:22:00] and it would say things like porn or Viagra or whatever they were selling. And then folks like Gmail came along and they said, “Anything with these words with this density, we’re going to flag and put into the spam folder,” and then the spammers were like, “Okay, we’re just going to use a zero instead of an O in porn and we’re going to swap out these characters. We’re going to use a one instead of an L.” And then Gmail caught that and then they came back again and they’re like, “All right, we’re going to put the entire message [00:22:30] in an image and that way we can say whatever we want.” And then Google started looking at the ratio of text to images. It’s just an arms race.

Folks have asked me, how are you going to fix this? I don’t think this is the one and done thing. I think this is going to be a constant process. That’s why we’ve got a spam team here at Nomics. It’s never going to be fixed. People are going to get more sophisticated over time, especially when you consider how decentralized the space is. The fact that anyone can, you know with like ZRX, [00:23:00] start up an exchange basically in a weekend. We’re going to have security token exchanges, non-fungible exchanges, we’re going to have local exchanges.

I mean, I think we’re just going to see more exchanges and this is going to be a harder and harder problem to spot over time. Tons of trades going through but flat order books or sometimes we see these huge order books and very little trading volume. Sometimes we’ll get the trades from an exchange and we’ll add up when we know [00:23:30] we have gap-less data, so some of these exchanges will give each trade a unique identifier, so each trade increments by one. We actually know that we have all the trades that have happened during a day and then we’ll see the candles that they’ll send over and the candles will have like a gajillion dollars more volume than the individual trades added up.

What’s another thing that we see? Sometimes we’ll see if there’s a big *** spread, sometimes we’ll see this bids leap across, like pole vault across the ask, [00:24:00] and some order will be filled like way out of market. Something for some ridiculous price for some *** coin and that order will be placed. It’s like, how does a matching engine even make that happen? You can’t snipe off orders from the order book. I mean, you can on some decentralized exchanges. But it’s just amateur hour right now. You can do anything and get away with it.

Rob: I think it’s pretty clear at this point in time that there is a lot of shenanigans, a lot of bad things happening [00:24:30] in the crypto space from an exchange perspective. But you’ve been in the industry kind of working hand in hand with these exchanges for over a year now really.

Clay: Hey! I wanted to pause for a second to let you know that this episode of the Flippening podcast is brought to you by Nexo.io Here’s a word from them…

Nexo is the only lender offering instant crypto credit lines, which let you use digital assets as collateral to get cash in 45 fiat currencies and stablecoins. Nexo is a strategic partner of exchanges, OTC desks, and crypto funds throughout its portfolio [00:25:00] of structured financial products. Institutional counterparties can earn up to 8% annually on their idle stablecoins, enter into asset swap agreements, or directly borrow crypto. Individuals can also park their cash and stablecoins with Nexo in an interest-earning account and get an annual return of 8%. What’s more, interest is paid out daily and you can add or withdraw funds at any time. So if you are looking to borrow, lend, or swap digital assets, Nexo is your go-to partner. Definitely explore nexo.io or if you’re an institution, [00:25:30] you can reach out to them at institutions@nexo.io

Okay, back to the show.

Rob: What are some of the good exchanges doing outside of the data? How have things progressed in the past year where things might actually be looking positive outside of the BS fake volume wash trading with some of the legit exchanges?

Clay: I think the main thing that seems to be changing is that these exchanges are starting to take their data practices [00:26:00] a lot more seriously. CoinMarketCap, as far as I know, is the very first aggregator and all they required was a ticker feed because it’s really easy to start ingesting data from an exchange with a ticker feed it’s like five, six data points.

An exchange would get up and running and the first thing they wanted to do when they were live to get distribution for their markets is, it’s like, “Hey, we got to throw up a ticker so we can get listen on CoinMarketCap.” And that’s smart in a lot of ways. With the New York Stock Exchange and the Nasdaq [00:26:30] there’s only really two big exchanges in the United States when it comes to stocks and they have a monopoly on the data. They charge an arm and a leg for their data.

But if you’re a crypto exchange, a lot of times your data is like this distribution channel. It’s a good way to advertise what your product is and if your products are these trading pairs where you make some money every time a trade goes across them, it really behooves you to share data.

These exchanges at the beginning were doing the very bare minimum. It’s like CoinMarketCap needs a ticker feed, [00:27:00] we’ll give them a ticker feed, and then essentially after that they would ignore their data all together. Maybe at some point a market maker would come to them and say, “We’d like order book data.” They’d come through and they’d just provide order book data snapshots or something through a web socket, but no historical order book data. To this day, I can’t off the top of my head think of one exchange that provides historical order book data. I don’t think anyone does that.

What we’re seeing is that data practices, [00:27:30] to a much greater extent since this report and since folks like us and others have done things to improve this state, or to add some kind of filtering, is exchanges are realizing that they need to do more than the bare minimum around data. They need to provide an audit trail and they really need to step up their game is they want institutional investors to take them seriously.

The problem is that so many of these exchanges have been [00:28:00] fudging data and it’s kind of like this arms race of volume spamming where it’s like you have to, in order to be at all taken seriously, you have to get past everyone else who is also faking volume. I don’t think we’ll see any time soon exchanges opening up full history, but they’ll probably say like, “Hey, we’re going to start on this date and moving forward data is going to be available.”

I was talking to one exchange and I said, “Hey, in order to give you an A rating we need full trade history.” [00:28:30] And they said, I’ll never forget this, they’re like, “Oh yeah, no, we just don’t keep it.”

Are you kidding me? Hard drive space is super cheap. He’s like, “Yeah, it’s just too expensive.” No it’s not. It’s not too expensive. The hard part is not storing it, it’s everything else. I think they were probably just lying. We get lied to all the time.

Rob: As somebody in the crypto blockchain world who sells your API to professional sophisticated [00:29:00] traders, institutional investors, whoever it might be, I’m curious as far as the past year or so, how have the conversations been reflective of the price? Has the recent bounce back in 2019, do you feel like that’s brought more interest back into crypto or specifically into the data surrounding crypto? Or have the conversations for you remained relatively stable kind of regardless of price [00:29:30] and considered maybe a more sophisticated class of trader that you’re mostly speaking with?

Clay: Our website traffic has gone up with the prices, but the API business and the data business, it’s growing, it doesn’t seem to be correlated with prices. We were growing even when the market was down. We’re just a lot like a utility company. It’s boring basics kind of business and we’re not seeing sales of API rise and fall based on the market cap. It’s mostly [00:30:00] correlative with like how good of a job we’re doing marketing that business.

Rob: When you look at just kind of like where the market is going, what type of features or functionality in the trading ecosystem do you think needs to come into place maybe outside of data?

Obviously, yourself and other individuals are working to improve the level of quality and the transparency of data for trading, but what else [00:30:30] is there in the industry that needs to happen for this to just kind of continue to move in a more, let’s say, professional manner?

Clay: I really think that the biggest products… like we don’t need another fork of Bitcoin, we don’t need another fork of Ethereum or Zcash. What we need I think is just Bitcoin infrastructure. I think the lightning network needs to grow, I think we need more and better ways to earn internet and to borrow, preferably in trustless [00:31:00] ways against those assets. I think that it’s just sort of the continued integration of really Bitcoin first and foremost into our daily financial lives.

It’s happening. I think at the very beginning it was about these tokens, but I love when I see Wire doing, and folks like Nexel or other loan based products, you know what Casa is doing with sort of these [00:31:30] lighting nodes in people’s homes. I think it’s more of that kind of thing. I don’t know, what do you think?

Rob: Yeah, I would echo those sentiments. I think that it’s been interesting to watch as the “bare market” happened, I think it was a good cleansing of the space from a lot of either just bad actors or a lot of people that raised money with just no intention of actually doing anything with it. And then there were kind of a subset I think of people that continued to just kind of grind through it.

[00:32:00] Whether that has been on the Bitcoin side, like you said, Casa, I have a node kind of sitting a few feet away from me.

Clay: Hey, me too.

Rob: It’s a pretty cool product, I like it. Whether it’s kind of advancements with Bitcoin and with lightning or there have been a lot of… the narrative around D5 with Ethereum has been pretty interesting to watch whether that’s the growth in CDP’s or compound finance and borrow lending or the BlockFi and the Nexus of the world, I think there’s just been a lot of increased [00:32:30] utility of actually owning these assets. The protocol development on the base layer of Bitcoin and the base layer of Ethereum on some of these other assets as well has been pretty good to watch.

All things being considered, I think the industry as a whole is moving in a positive direction, and it’s just kind of, people want things to happen quicker because there is usually a price associated with basically everything in the industry and it doesn’t necessarily rely on any type of fundamentals at all. [00:33:00] But it’s something that you kind of have to either have some type of long term conviction and be patient on or get out, kind of.

Clay: If you think about the development of the internet, there was TCPIP, and then ATTP, and then HTML, and CSS, and I think a lot of people are expecting full on start ups that can do things like Uber and AirBNB. We’re just not there. The tech stack is super, super, [00:33:30] super early. We’re still trying to get things like custody.

I think the foundation is people’s expectations, they just seem like Instagram come and then blow up or we’ve seen all these things that have benefited from literally two decades of hard core innovation on top of the internet and we’re only one decade in right now so we don’t have our AirBNB or Uber’s just yet. But I think it’s coming.

Rob: Yeah, and it’s like if you had TCPIP [00:34:00] shares that you could publicly trade on a daily basis, 24/7, 365, too. It just adds in a whole nother level of complexity and removes I think a lot of any patience. It gives the nice dopamine hit when you look at the charts and things like that. But it’s very interesting in the short and I think long term, too, just how you can break down the perspectives and look at things for sure.

Clay: I think kind of something that’s different during this bull market versus the last one is I think we’ve just got a lot more [00:34:30] sophistication among institutional investors, but also among individuals. I think the conversation that we’re having about data is just part of that. It’s my understanding that there are so many more people that understand blockchain data and how blockchains work than understand how the exchange ecosystem works.

We do this weekly webinar at Nomics where we go over like, here’s how a Bitcoin exchange works, here’s [00:35:00] market data 101. We have people from like large banks and analysts that are like, didn’t know how this stuff actually works. But more and more people do understand how this stuff works.

When people come to us to buy data, the biggest problem we have is that people literally don’t even know in many cases how to ask for what they want. They literally don’t know how to specify what they’re looking for because yeah, there’s a lot of similarities to sort of traditional exchanges. But it’s sort of this mix of like traditional exchanges [00:35:30] and for X minus regulation, minus quality controls. It’s just completely different.

But I love seeing the infrastructure come together. I love to see people’s understanding of the space improve and I think we’re well on our way. I don’t think we’re going to see Bitcoin at this is for entertainment purposes only. I don’t think we’re going to see Bitcoin at like four grand again. I think those days are long gone, fingers crossed.

Rob: I hope so. But I do tend to agree with just the commentary [00:36:00] around infrastructure. I think that when you look back at how primitive and just general shitty a lot of the infrastructure was in 2017 that carried the entire crypto market up to 800 billion dollars. The exchanges and the level of support and basically everything about the market in 2017 was, whether it was centralized exchanges they just weren’t ready for, decentralized exchanges, the biggest decentralized exchange, really the only one at the time was EtherDelta.

There are just so many more [00:36:30] on-ramps and just such a broader variety of products that have had really two years at this point in time, or a year and a half at least to kind of season out and flush out a lot of the technical issues as well as just people issues with support and kind of building that out, that’s been good to watch.

One kind of question that I’m a little bit curious on as far as working with the professional traders that you do that receive data from these exchanges that you provide to them. [00:37:00] Another area that seems to be pretty hot right now is on-chain data as well. I know that’s not something that you necessarily do with Nomics, but are you seeing professional traders kind of utilizing some type of combination of the Nomics API with something maybe from Coin Metrics of from some other place where they’re trying to utilize exchange data and on-chain metrics of the same point to create better investments or better trading strategies?

Clay: Yes. It’s still a pretty, [00:37:30] sort of niche data need. Most investors in the space don’t have a highly reliable, in the sense that it stands up to back tests, hypothesis about what to do with on-chain data. If there’s more addresses those could potentially be from the same people so that could point to an increasing awareness in security or how Chainalysis is crawling the chain so what do more addresses mean? What does transaction volume [00:38:00] on the Bitcoin network mean? Does it mean that more people are moving their coins to exchanges because they’re going to sell? Or does it mean that they want to exchange it for something else?

I personally don’t know of more than a handful of funds with active strategies that have really robust hypotheses around on-chain data that they’re willing to put a lot of money behind. So I think that space is still somewhat new and I think the further away [00:38:30] you get from just really Bitcoin and Ethereum, the less predictability that kind of data has. If you go to like EOS or whatever, the people are just making up transactions and there’s plenty of blockchains where transactions are really, really cheap and it’s not necessarily clear what’s happening when transactions are taking place.

We’re still not getting a ton of requests for on-chain data. In my opinion, there isn’t right now a mature, large market for on-chain data. [00:39:00] I question whether or not a startup is going to generate enough capital with on-chain data to hire top talent and continue to grow. I think that that space and that ecosystem is not yet very commercially viable.

I think it’s something that a lot of people want to look at and people… it’s like nobody wants less data. But in terms of people willing to pay cold hard cash in large amounts [00:39:30] that would justify top engineers and continued R&D, I don’t know that that exists right now.

Rob: One thing you mentioned was Chainalysis, another type of those blockchain analytics companies. Does that factor in at all to examining the kind of exchange data? Is that more of like an outlier, on-ramp, off-ramp type thing? I’m just kind of curious if that has any type of play into the perceived trustworthiness or quality of [00:40:00] data if any specific exchange might leverage something like a chain analysis?

Clay: The people that come to us, typically they’re looking for data so that they can make more money. Chainalysis and those folks, or services like them, it’s more around regulation, security, forensics. Someone stole my Bitcoin, where did it go? Or exchanges like Coinbase have reportedly used tools like that to make sure that dirty money isn’t getting into their wallets. [00:40:30]

I honestly have very little visibility into people’s forensic needs or needs for this data around regulatory purposes. It’s more around making cash and generating returns.

Rob: As far as everything goes I think we’ve covered quite a bit with the general topic of the nonsense around cryptocurrency exchanges, how somebody can potentially protect themselves around the issues that are happening right now.

[00:41:00] Is there anything maybe we didn’t cover you would like to just kind of add onto at this point?

Clay: I saw a tweet from Circle the other day and they were talking about the state of Poloniex when they purchased it. They had something like thousands upon thousands of open tickets when they purchased.

Rob: It was like 190-something thousand.

Clay: It was like 190-something thousand. I remember there was a point in 2017 where everyone was using Poloniex. At one point it was the top exchange.

Rob: Top dog.

Clay: Yeah, it was the top dog. [00:41:30] To kind of be in a place where the top dog exchange has a hundred thousand plus open tickets to a place now where the top exchanges that people are using have solid operations in place. They are answering their support tickets for the most part. It’s really refreshing and I think we’re just in a very different place right now in 2017 than we were in 2019 and it’s great to see real operators coming in.

I think back in the day it was like any project [00:42:00] with someone with a vaguely impressive pedigree was getting funded because BC’s investors really didn’t know who to back at that time. So you’d see people where you’d look at them and be like, “Okay, Stanford computer science, ex-AirBNB, ex-Coinbase,” or something, and then you dig into it and you realize they were like an intern at Coinbase, they dropped out of Stanford, and they were like a product manager at AirBNB for like eight months or something like that and you’re like, [00:42:30] “How did that guy get funded?”

It’s really great to see people with real experience I think building up companies and I think the VC money is getting smarter, they’re demanding roles on boards which, there’s this sort of hardcore boot strapper part of me that’s like, “No VC’s shouldn’t be on boards,” but actually my experience with VC’s on boards is it makes for good governance. The governance sun on these companies is getting better and I think that the space is just up leveling over and over and over again. [00:43:00]

I think we’re still going to continue to be embarrassed again and again and again just like we were embarrassed by the Bitwise reports, I mean the Spacewise. It just keeps on getting better and it’s encouraging to see.

Rob: I’m on board with a lot of the things you said. I think there’s a lot of good to be drawn from what’s happened recently and just a lot of general improvements and I think a lot of that has just been kind of societal pressure or community pressure, which has been trying to cleanse out a lot of the bad actors and that’s been nice. [00:43:30] Just because you feel a little bit better about operating in the ecosystem. There’s still a lot of issues where you look at and you’re like, “This is a weird place to work full time.” But outside of that, it’s I think still moving in the right direction, hopefully not getting worse at least because for some points in time it couldn’t get much worse.

Clay: It’s less of an amateur hour environment than it used to be, thank God.

[00:44:00] Well, that concludes my conversation with Rob Paone from the Crypto Bobby Podcast. I hope you enjoyed it.

Before you go, I want to mention that since we’ve started producing episodes at a much higher rate, we now have room for a few more sponsors. If you like the work we do and would like to support this show, then a sponsorship might be a good fit for you.

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Alright, that wraps up things for this week. Stay tuned for next week’s episode. Until then, take care.