For an industry that is supposed to be based upon decentralization, it appears to be getting crowded at the top, with a number of companies transforming into unspoken oligarchs, each wielding huge influence — or at least that’s what some critics argue.
One of the most remarkable crypto companies operating today is Binance. In only three short years, Binance has enjoyed a meteoric rise to the top. Criticism of Binance, philosophical or otherwise, can’t fail to take into account the impressive stream of innovation the firm seems to channel. Headed by Changpeng Zhao, the Twitter-happy CEO better known as CZ, Binance has a carefully crafted image of a firm hoping to make crypto a better place.
Such an unspoken narrative also helps set the scene for the company’s expansionist activity. With the firm reporting in 2018 that it had opened an office on the historic Mediterranean fortress island of Malta — known to some as “Crypto Island” — Binance’s struggle against Chinese fiscal policy could be seen by historically minded analysts as a 21st-century sequel to one of Malta’s most defining historical moments: the failed siege of Suleiman the Magnificent against the embattled Knights Hospitaller, in which one small group stood its ground on the tiny island, just beyond the clutches of a fearsome power.
But history is written by the victor, and true to the confusing nature of a post-truth world, it’s hard to tell the same tale as a simple story of good versus evil. In keeping with the natural character arc of any hero becoming a villain in the eyes of their detractors, Binance’s recent actions have strayed into a gray area, putting its fairly clean image under scrutiny following the purchase of exchange ranking platform CoinMarketCap.
Binance and CoinMarketCap become one
Against the backdrop of a global economy existing in a petrified stasis thanks to COVID-19, the two firms announced the deal on April 2. In fitting with the firm’s narrative, CZ championed the collaboration, telling Cryptox that the two companies share a mission of bringing crypto to the masses. CZ prophesied that the two companies would play to each other’s strengths and make the industry more transparent.
Almost two months later, it seems that only one of those aspirations has come to fruition. CoinMarketCap is now moored in a safe harbor after Binance’s takeover. Binance, on the other hand, now occupies the precarious position of being a major international exchange and owner of the most prominent ranking platform.
In business, reputation matters. Thanks to the unique development of Big Tech in Silicon Valley, companies now enjoy messianic levels of support from employees and companies alike, and when the companies led by these influential figures reach the top, they begin to shape the agenda in their own favor.
Taking a quick look at how much the so-called “Big Four of Tech” spend on political lobbying confirms this fact. Again, the crypto industry is a microcosm of the wider world around it, with companies, individuals and tokens commanding fierce and partisan support. But for many in the industry, the purchase of CMC was a brazen example of a conflict of interest. Jack Purdy, an analyst for Messari, told Cryptox that the takeover sets a negative precedent for the industry, no matter how well either company behaves:
“It does represent a fundamental conflict of interest that has negative externalities for the space. It’s like if Joe’s Pizza came out with the top 10 pizza slices in New York and everyone that uses that list happens to be those least informed to make the decision on where to go. Even though Binance/CMC can be completely well-intentioned, it’s impossible for ratings not to be influenced by the underlying bias of the creators. If there are objective weightings to a system that would hurt Binance’s standing, it’s more likely than not that it won’t be implemented.”
Cryptocurrency’s own origin story is shrouded in mystery, founded by its very own pseudonymous figure, Satoshi Nakamoto. While the arguments justifying this probably number in the thousands, the result is that intrigue and conspiracy are consequently innate to the makeup of the industry. As a result, regardless of how much Binance tries to distance itself from its newly acquired aggregator, it seems that suspicion is likely to remain. Jay Hao, the CEO of major crypto exchange OKEx, outlined his view to Cryptox that a company owning any kind of rating agency that oversees its own field of business is unethical:
“Ethical issues tend to arise should there be a participant happened to be owning a ranking/rating company. It’s perceived to be inappropriate for a major shareholder of a credit rating agency to also be a shareholder in a bank who handles millions of bond insurance. Not to mention there are lack of sufficient firewall requirement defined by regulator as in crypto space.”
Ciara Sun, the head of global markets at Huobi Group, also voiced her concern to Cryptox that the Binance buyout was a conflict of interest:
“Ethics is only a concern when there’s a clear conflict of interest involved. In CMC’s case, Binance’s involvement has compromised its neutrality. I wouldn’t go as far as to suggest any malicious intent behind the acquisition but it does raise some ethical concerns given the benefits Binance stands to gain if they were to manipulate the ranking system.”
But criticism of the purchase was not universal, even among Binance’s competitors. Paolo Ardoino, the chief technology officer at Bitfinex, outlined to Cryptox that the action, as far as he is aware, is not illegal and could provide an opportunity for Binance to improve the ownership structure and ranking metrics:
“Owning an exchange and a ranking platform raise potential conflict-of-interest concerns, but we are not aware of any illegality and, again, people are free to come up with a better ownership structure and set of metrics if they want.”
Anndy Lian — a blockchain advisor, investor and prolific Twitter commentator — told Cryptox that while an exchange owning a rating platform is far from perfect, there are potential benefits to be had if good corporate governance and firm regulations are in place:
“Take Binance for example, people will start to gossip that Binance is on top of the charts because they are the owners. But is this true, we are not sure. I believe as well, if there are proper compliance and governance and also arm length relationship would be good enough too for this example for Binance and Coinmarketcap. They have to properly address this to all the stakeholders to assure them of the independence between the 2 companies. They can also look at having all the data is stored in a decentralised platform to ensure data integrity.”
Traffic jam: CoinMarketCap’s ranking metrics get sticky
As the weeks rolled on, it became apparent that the controversy surrounding CMC and Binance would not be contained to the takeover alone. Just six weeks after its new owners moved in, a high-profile change took place: Binance shot to number one on the exchange rankings.
It meant that CMC was enveloped in its second controversy over its ranking methodology in just over a year. The first instance took place in late March 2019 when research from cryptocurrency index fund provider Bitwise claimed that CMC hosted vastly over-exaggerated volume statistics. According to the report, the volumes deceived investors and inflated the profiles of certain tokens.
CMC quickly issued a statement in which it assured that it was diligently taking note of feedback and working on ways to develop a more effective metric system. The revelation sent shockwaves across the industry, undermining for investors the belief that the sector was evolving at an impressive rate. Many business leaders and prominent industry figures expressed their displeasure at the news. One, in particular, took issue with the fact that this metric allowed individual listings to rapidly climb the ranks, arguing that it would lead experienced investors to be suspicious. His name? Changpeng Zhao.
After months of head-scratching behind closed doors, CMC announced in November 2019 its new metric that compared crypto exchanges and token pairs based on liquidity. What was set to be the default metric for the ranking platform only survived six weeks into its new ownership.
On May 14, CMC announced that it had once again changed its methodology to rank exchanges based on web traffic by default. In an exclusive statement to Cryptox, CMC elaborated on the rationale behind the much-discussed “Web Traffic Factor,” stating that it is only one aspect of its overall process:
“Rather than wait for the perfect solution, our team has decided to take an iterative approach. The Web Traffic Factor is only one of many steps that we will continue to take as we iterate on algorithms that will best serve our users. With the faster speed of release, we hope to be able to take more feedback that will factor into the next iteration. This way, we can monitor how well each iteration addresses our users’ concerns, and adapt more optimally for the next iteration, and at the end of the process, produce products that our users believe in and will find most useful.”
While this may go some way toward providing an explanation for the rating change, for some observers the timing of Binance’s rise to the top-ranking spot on CMC is no coincidence. This is a view cautiously put forward by Huobi Group’s Sun:
“Like many in the community, I suspect that it has something to do with CMC’s new ownership. I can’t say for sure that Binance intentionally influenced the new ranking system to its benefit but it’s likely no coincidence that they’re now ranked number one.”
OKEx’s Hao wasn’t afraid to mince his words, telling Cryptox that the circumstances clearly pointed to the true reason for Binance’s rise to the most coveted spot on CMC’s index:
“A partnership with a clear conflict of interest. Or just a very convenient coincidence that soon after being bought, the go-to authority on exchange rankings changes its ranking criteria to a metric that happens to favor its buyer.”
In a statement shared with Cryptox, CMC sought to assure that it remains a separate entity, despite its new ownership: “CoinMarketCap will continue to be run as an independent entity. The team at CoinMarketCap will continue to make decisions that are in the best interests of CoinMarketCap users.”
But only a few days before on May 14, CZ appeared to admit to some degree of involvement in managing CMC, tweeting that the “ranking is currently heavily biased towards web traffic, not 100% accurate, but better than before. Will continue to iterate.”
While CZ is known for his seemingly unparalleled engagement with customers and critics alike on social media, it begs the question of why he would make public the managerial decisions of CMC, an institution that supposedly operates free of interference from its new owners. Regardless of whether or not this is an Elon Musk-style gaffe or evidence of a lack of separation, it has left the crypto community with further questions.
How should ranking be carried out?
Questions of ownership aside, the whole CMC fracas once again places the role of algorithms and ranking methodologies on center stage. While it’s easy to pass this off as a squabble between competitors in a niche financial sector, this has real consequences for investors and smaller businesses that depend on the crypto infrastructure. So, what do the top exchanges think about CMC’s web traffic metric?
The responses from some of the industry’s leading exchanges have not been overly supportive. Bitfinex’s Ardoino said that liquidity, volume and volatility should take precedence when ranking exchanges:
“We believe that liquidity and the ratio between volume and volatility are the two most important factors both because they are highly relevant for exchange businesses and difficult to fake. Web traffic is interesting but not particularly important.”
OKEx’s Hao maintained that using web traffic as the default for ratings is not effective because the data is easily manipulated, and he echoed Ardoino’s recommendation that volume and liquidity are more reliable:
“The data can be skewed by mobile and VPN-directed traffic. Website traffic is just one metric but can never be the default ranking metric. This is why exchanges have not been ranked by traffic alone but by more robust metrics that can give a far more accurate and transparent score based on volume, liquidity, and market depth.”
Huobi Group’s Sun also added her criticism of CMC’s decision to make web traffic its default methodology, going as far as to label it a “vanity metric” and pointing out that CMC itself had announced it did not think it was effective:
“Ranking exchanges by web traffic is very limiting and CMC seemed to maintain a similar view up until now. At its core, web traffic is not a good indicator of an exchange’s user base, activity, or adoption. It’s a vanity metric that can be easily manipulated and does not factor in other user access points like mobile applications, which account for a significant amount of total user activity.”
But rather than simply taking issue with the fact that CMC favors web traffic, Sun added that “the way CMC measures web traffic is highly flawed,” telling Cryptox that the global distribution of service users, search engine optimization and language choice all play an important role in creating a balanced measurement:
“It only measures traffic from a single domain per exchange, which means they’re not presenting an accurate and global standing. We have different domains for different jurisdictions and markets we support all over the world but they aren’t being accounted for. I have a similar issue with the way they measure SEO and keyword searches. Despite CMC supporting multiple languages, they only weigh English keywords so there’s some bias there. If you’re going to use web traffic and SEO as a factor, you should be much more inclusive because all communities matter.”
How can data be made more public/trustworthy?
Now that a light has been shone on how exchanges are ranked on CMC and its struggles to strike the right balance of factors in its algorithms, how much other data is trustworthy, and how can it be made more public? Joshua Frank, the CEO of analytics platform The Tie, outlined his view to Cryptox that data remains inflated on the majority of exchanges, as well as that ranking platforms do not seem to be doing a thorough job vetting exchange volumes, citing previous analysis conducted by The Tie that reported 87% of volumes to be suspicious. Frank gave an insight into the motivation for exchanges to inflate or mislead data:
“Exaggerating volume exists as a mechanism for illiquid exchanges to attract new clients to their platform. No one wants to trade on a platform without liquidity. Without liquidity, users can’t execute trades or get the best price for an individual asset. Faking volumes also enables exchanges to rank highly on data sites given the current ranking structure for many data platforms, increasing the exchanges’ referral traffic.”
If so many exchanges are able to get away with fudging the numbers, there is clearly an issue with transparency. For a sector that is supposed to pride itself on the open availability of information, this is not a good indicator of industry health. While acknowledging that transparency is an issue, OKEx’s Hao said that exchanges are improving in this respect:
“Over the years, Exchanges are getting increasingly transparent. Basically all major exchange’s trades, filled orders, orderbook are all publicly retrievable via API. Hence the liquidity and volume dynamics of the exchange can be evaluated by everyone. Some of the major exchanges like OKEX and Kraken would disclose in real-time its status of matching engine or wallet availability.”
For Sun, the way that information is presented can also create problems when trying to analyze it or make it available to the public. Sun said that independent analysis is necessary for exchange data, but not at the expense of compromising sensitive user data:
“There’s already a lot of exchange data that is publicly available but the problem is that the way it’s analyzed and presented can lack transparency. Data can be manipulated to benefit or harm and it can offer a facade of transparency. That’s why we need an impartial analysis of the data that’s already available before we introduce more data into the equation.”
Finding a way back
No matter what measures Binance and CMC claim to have put in place to ensure that they are separate entities, it appears that the damage has been done, as far as critics are concerned. Regardless of whether there is managerial influence between the two, rumors will continue to circle that CMC is simply a proxy for Binance to further its business aims.
For many, the timing of Binance’s leap to the top is far too convenient for it to be anything other than an example of the firm’s invisible hand behind the scenes, which is something that will not be swept under the carpet by the crypto community. But for now, it remains to be seen whether this instance will mark a turning point in an industry that prides itself on transparency and decentralization or pinpoint the moment when a pantomime of good intentions finally falls to pieces.
