Andrew Kang: Is there really fake trading activity on the Binance Smart Chain?
There is not much evidence to confirm the existence of a large number of fraudulent trading activities on the Binance Smart Chain; on the contrary, many rapidly growing trading activities are initiated by new investors as genuine transactions.This article was published on ChainNews, author: Andrew Kang, translated by: Lu Jiangfei.
In the past few weeks, there have been many allegations of fake trading activities on the Binance Smart Chain (BSC), but solid evidence has been scarce. Mechanism Capital studied the users and economic activities of the Binance Smart Chain and compared them with other DEXs. Let's take a look at the analysis results.
We found that one of the most criticized "suspicious activities" on the Binance Smart Chain is its unique address activity. The spike in this metric was primarily due to a large number of CHI tokens being minted. Subsequently, BSCscan adjusted its algorithm to exclude addresses generated by the CHI contract, and this metric quickly declined and returned to normal levels.
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Another point of skepticism might be the excessively high locked value on PancakeSwap (PCS). Of course, this could be due to some people's inherent biases against Asian cryptocurrency exchanges, believing that they have some "bad reputation" for wash trading. However, if we delve into PancakeSwap's automated market maker (AMM) mechanism, we might understand why they have gained so much locked value in a short period.
First, we need to understand one thing: wash trading on decentralized exchanges (DEXs) is often much more difficult than on centralized exchanges (CEXs). Although the Binance Smart Chain does not completely resist censorship, trading data is still open and verifiable, which is very different from the trading conditions on CEXs, where trading volume data can be easily fabricated.
On the Binance Smart Chain, if they want to execute wash trading, it means they have to pay fees, unlike some CEXs where fees can be refunded or simply waived. The average daily trading volume on the Binance Smart Chain is $1 billion, and if we calculate at around a 20% fee rate, it means they might need to pay about $2 million in fees daily, totaling $730 million a year.
Assuming Binance has enough money to cover these fees, what would happen? Let's continue analyzing. Typically, when identifying fake trading, it is necessary to compare liquidity conditions and trading volume. If an exchange has high trading volume but low liquidity, it is likely to raise serious concerns.
For CEXs, there are many ways to assess liquidity, and the best way is to test the order slippage of the trading platform. As early as 2018, renowned trader Sylvain Ribes conducted an excellent analysis on this. For automated market maker DEXs, assessing liquidity is actually much simpler, as the locked value is a direct representation of liquidity and is easy to quantify. It is undeniable that there is real liquidity on the Binance Smart Chain. As expected, with the increase in locked value, trading volume also rises, liquidity boosts trading volume, and increased trading volume further enhances liquidity.
Next, let's introduce another concept: DEX AMM Velocity, which is the ratio between trading volume and locked value. This metric can be used to track the turnover speed of AMM funds. A higher number indicates that funds are being transferred more quickly (higher fund flow), which can be subdivided into two categories:
- Non-arbitrage fund flow
- Arbitrage fund flow
Non-arbitrage fund flow essentially comes from the trading activities of real users (of course, it could also come from bots engaging in non-arbitrage trading). In this regard, Uniswap clearly has many advantages, as this DEX is the preferred trading site for most traders. However, according to trading data from DappRadar, we find that PancakeSwap actually has a considerable user base.
In contrast, all other DEXs have fewer users than Uniswap and PancakeSwap, indicating that there is relatively more non-arbitrage fund flow on Uniswap and PancakeSwap. Additionally, in terms of user metrics, currently only PancakeSwap and Bancor are continuously growing. Although SushiSwap has high locked value and traffic, it can only consistently "attract" 2,000-3,000 users daily.
If we compare the "trading volume / user count" metric, we will find:
- Trading volume / user count is increasing overall, reflecting higher asset prices;
- The trading volume per transaction on Curve is higher;
- SushiSwap and Balancer have higher trading volume / user count, indicating that these two platforms are mainly dominated by "whales" and involve arbitrage trading;
- In contrast, Uniswap and PancakeSwap are the preferred choices for retail investors.
One thing to note is that a low "trading volume / user count" ratio does not mean that the arbitrage fund volume is also low. There are also high arbitrage trades on Uniswap and PancakeSwap because both exchanges have high locked value and low gas fees, which provide greater arbitrage opportunities due to higher liquidity and lower trading costs.
The trading costs on PancakeSwap on the Binance Smart Chain are 100 times cheaper than those on Uniswap, with a trading fee rate of only 20% (Uniswap is 30%), so you will see more arbitrage opportunities on PancakeSwap. To understand this better, let's imagine the following scenario:
On a centralized cryptocurrency exchange, the price of ETH first rises by 35% and then falls by 35%.
On Uniswap, even considering trading fees, gas costs, slippage, and other factors, the total cost for an arbitrage bot's trade would not exceed 35 basis points. On PancakeSwap, the arbitrage trading cost might reach 25 basis points, allowing arbitrage trades to occur simultaneously on both platforms.
In short, DEXs with lower execution costs can achieve liquidity with higher trading frequency compared to other DEXs. To further illustrate this point, we gathered social media data from various Binance Smart Chain channels, such as Twitter and Telegram. Since this is not a quantitative analysis, we do not have fancy charts, but the community engagement on the Binance Smart Chain is very high and quite real—the actual participation scale is even higher than that of projects on Ethereum.
Considering that Binance itself has a large user base and that Ethereum DeFi projects have higher costs, it is possible for the Binance Smart Chain to see a surge in trading activities in a short time. As for retention rates, project-level activities, and platform tokens, current data analysis does not show significant differences.
Overall, based on our analysis, there is not much evidence to confirm that there are large amounts of fake trading activities and bot activities on the Binance Smart Chain. On the contrary, many of the rapidly growing trading activities on the Binance Smart Chain are real, primarily initiated by less mature new retail investors.
