How big players in crypto can manipulate data

How big players in crypto can manipulate data


With data manipulation concerns impacting investors, we explore the solutions to ensure trust and transparency.

In today’s digital age, when trust can make or break fortunes, many are left asking: who’s watching the watchers?

Too often, it’s everyday investors who bear the brunt of hidden data games and deceitful practices. From Wall Street to the crypto universe, integrity gaps can cost dearly.

Let’s delve into the heart of the matter, exploring how crypto companies could manipulate data and offering insights into the broader challenges and potential solutions in our digital age.

Flaws of centralized systems

In 2008, Lehman Brothers’ collapse emerged as a notable case of data manipulation that exacerbated the financial crisis. It was closely linked to a financial maneuver called “Repo 105“, which allowed Lehman to hide $50 billion of borrowed money by temporarily moving these assets off their records.

“Things haven’t gotten that much better since 2008 in terms of database services behind the scenes,” believes Scott Dykstra, CTO and Co-Founder of Space and Time, a decentralized data warehouse. He spoke exclusively with at the Chainlink conference in Barcelona and shared his views on the situation.

The cryptocurrency realm, particularly its centralized platforms, can be susceptible to data manipulation. Dykstra, comparing centralized exchanges to black boxes, said:

“Centralized black boxes could, in theory, manipulate data if they wanted to. But there’s this level of inherent trust: We trust CoinMarketCap, and they trust Binance. But the whole point of web3 is that you shouldn’t trust anything. You should verify everything.”

The recent FTX scandal involving CEO Sam Bankman-Fried represents the latest case of alleged data manipulation in the crypto space.

At the core of the scandal was the manipulation of FTX’s native token, FTT, which, according to prosecutors, was intertwined with fraudulent activities that veered FTX off its proclaimed transparent operations.

Here are some other ways through which data manipulation could lead to issues:

Order books fabrication

One glaring risk is the fabrication of order books. Instead of reflecting genuine buy and sell orders, a manipulated platform might display inflated or deflated numbers, misleading traders about the real demand or supply of an asset.

Additionally, fake trades can be executed—transactions that appear real to outsiders but are merely a mirage, orchestrated to create an illusion of high trading volume or price movements.

In essence, while centralized platforms offer convenience, they also present opportunities for deception, potentially jeopardizing the investments of countless individuals.

Fake trading volumes

Forbes’ 2022 analysis of 157 crypto exchanges sheds light on a troubling level of data manipulation, revealing that 51% of the daily Bitcoin (BTC) trading volume reported is likely bogus. 

A predominant form of this manipulation is wash trading, where misleading market activity is created by simultaneously buying and selling assets to inflate trading volumes, giving a false impression of asset liquidity and market activity. 

This lack of genuine market activity is exacerbated by poor surveillance across exchanges, a reflection of the crypto market’s nascent and largely unregulated nature.

The analysis also underscores a notable lack of universally accepted methods for calculating Bitcoin’s daily trading volume, with different industry research firms and exchanges reporting varying figures. Regulatory loopholes further contribute to the problem, with exchanges operating with little or no regulatory oversight, significantly contributing to fake volume reporting.

The bogus trading volumes mislead investors regarding true market activity and liquidity, potentially leading to misinformed investment decisions. 

Is blockchain a universal solution?

Numerous companies in the crypto sector are actively developing solutions aimed at enhancing data transparency and verifiability. Space and Time, led by Dykstra, has introduced a zero-knowledge protocol, Proof-of-SQL, to validate the authenticity of data handed to smart contracts.

While tech enthusiasts might immediately think of blockchain when discussing cryptographically verified databases, Dykstra emphasizes that not all systems require blockchain. Presently, enterprises predominantly adopt blockchain for financial applications, with sectors like supply chain, insurance, and healthcare records lagging behind in their transition to blockchain technology. Dykstra describes blockchain as “an over-engineered, over-complicated, over-expensive solution for non-valuable data” and highlights the availability of cost-effective, well-established cloud databases as viable alternatives. He further added:

“Is there an incentive for an attacker to want to manipulate healthcare records? If so, then it might be a good use case for blockchain. But right now, the incentives aren’t high enough to make blockchain a necessary tool for that kind of data.”

Looking ahead, Dykstra hopes that by 2028, we’ll have trustworthy and reliable data. This doesn’t just mean using blockchain; it’s about creating a digital world where we can rely on our data, knowing it speaks the truth.

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