Analyzing on-chain data from PancakeSwap to investigate whether Binance Smart Chain is involved in fake trading
The rise of Binance Smart Chain has opened up another window for retail investors who are unable to participate in the decentralized finance (DeFi) ecosystem on Ethereum. However, concerns about its lack of decentralization and innovation have also attracted criticism from Ethereum enthusiasts and decentralization advocates. The debate over whether its on-chain transaction volume is real or fake has become a hot topic of discussion in the cryptocurrency community.
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Authenticity of PancakeSwap Trading Volume
Cryptocurrency risk investor Andrew Kang released a series oftweets today, discussing whether there are false trading activities on the Binance Smart Chain's largest automated market maker protocol (AMM) PancakeSwap. Generally, when assessing the suspicion of wash trading volume, two important parameters are relied upon, namely trading volume and liquidity.
The liquidity of a typical centralized exchange is judged by the order book slippage, while the liquidity of AMM can be easily determined from the locked assets. As can be seen from the chart below, PancakeSwap's total locked assets have experienced explosive growth since the beginning of 2021, which is the most direct data to prove PancakeSwap's liquidity.
Regarding trading volume, Andrew Kang stated that wash trading volume on decentralized exchanges (DEX) is harder than on centralized exchanges (CEX) because trading data is open and verifiable, and most importantly, the exchange fees are paid to liquidity providers rather than the exchange itself. The Binance Smart Chain's daily trading volume is around $1 billion, which means that the daily cost of wash trading volume is approximately $2 million based on a transaction fee rate of around 0.2%, amounting to $730 million annually, which is a considerable sum.
However, since the trading costs on PancakeSwap on the BSC chain are 100 times cheaper than on Uniswap's chain, and PancakeSwap's fee is only 0.2% (Uniswap is 0.3%), this indicates that there is more arbitrage space on PancakeSwap, leading to many people questioning whether a large portion of PancakeSwap's trading volume comes from arbitrage funds.
In response, Andrew Kang believes that the data from DappRadar shows that PancakeSwap's user base is actually substantial and continues to grow, and most decentralized exchanges do not have as many users as Uniswap and PancakeSwap, indicating that there is relatively more non-arbitrage funds flow on Uniswap and PancakeSwap (i.e., actual trading users).
Furthermore, Andrew Kang further compared the "Trading Volume/Users" data of various decentralized exchanges and found that Uniswap and PancakeSwap have the lowest values, indicating that the main users of these two platforms are retail investors.
Finally, Andrew Kang concluded in the tweet:
"Overall, based on our analysis, there is not much evidence to confirm a large amount of false trading activity and bot activity on the Binance Smart Chain. On the contrary, many of the rapidly growing trading activities on the Binance Smart Chain are real, mainly initiated by relatively inexperienced retail investors."
Community Responses
Andrew Kang's analysis has sparked various responses in the community. FTX exchange founder Sam stated:
"I have always believed that most of the transactions on BSC are real, but I lacked confidence in this idea, and I am glad to see such a deep analysis."
Fake volume is a long-running concern in crypto.
When we looked into it:
1) there's lots of fake volume
2) there's lots of real volume
3) it's not always obvious on priorsMy prior is that BSC would be majority real volume, but not confident; good to see real digging! https://t.co/HMUY4vx956
— SBF (@SBF_FTX) March 15, 2021
Larry, who has always had a contentious relationship with Binance, pointed out a blind spot in the analysis, stating that Andrew Kang claimed that the cost of wash trading volume would require $2 million per day ($730 million annually), but considering that if Binance itself is the main liquidity provider for PancakeSwap, the actual cost would definitely be much lower. Therefore, without further analysis of the liquidity provider's addresses to determine where the liquidity comes from, it cannot be confirmed that the cost of wash trading volume is expensive.
You mention that Binance would need to pay $2M a day ($730M annualized) to wash trade but that’s not really correct if we assume that the vast majority of liquidity is being provided by Binance itself. The most convincing analysis here would be to focus on the addresses LPing
— Larry Cermak 🫡 (@lawmaster) March 15, 2021