The Web3 industry has grown rapidly this year, with smart contract deposits reaching $59 billion. Gaming is becoming more popular with each passing day. Lately, gaming startup Limit Break raised $200 million. The project gained popularity after successfully launching a free-mint NFT collection called DigiDaigaku.
The crypto industry saw an unprecedented level of funding in Q1 2022. According to reports from Dove Metrics and Messari, $30 billion were raised over the first six months alone. This is more than the $30.2 billion seen in 2021. Out of this sum, more than $20 billion has been invested in decentralized finance (DApps, NFTs and Web3).
One might question whether or not the majority of that money has been deployed effectively in ventures owned by investment groups. In recent months, there has been a surge of new investors who want to get involved with decentralized applications.
Despite the healthy distrust in DApp’s active user count, no hard evidence has been presented yet to support this belief. Retail investors can use three primary metrics to detect inflated activity: active users, community engagement, and liquidity.
Comparing Registered Users to Active Users on Web3
Minimal fees and no registration are required to make it easy to set up an account. Developers and investors have been gaming the system by creating fake active addresses. This leads to a plethora of “fake” interactions with the DApp.
Ranking these DApps by a number of users always shows massive data. These decentralized applications (DApps) are said to have more active users than industry leaders like OpenSea, Uniswap, and Axie Infinity.
Collecting data on bots and game accounts, Levan Kvirkvelia found that 40% of active users in 60+ Web3 games and DApps are automated. The cofounder behind the Jugger Web3 prevention service analyzed this information to help users gauge the extent of the damage.
Some games on the Polygon network, like AnRKey X, have a bot-to-holder ratio of 84%. Kvirkvelia’s research shows that analysts should not use the number of token holders as a proxy for active users.
Fake Community Engagement
One sure way to check for bots is to analyze community engagements on social media. The well-funded projects buy users for their social media accounts, but these users (bots) can’t engage in comments reasonably and consistently.
The analysis doesn’t take longer than 10 minutes because it only requires one to log in and scroll through the last few messages. All you have to do is check for reasonable debates by the community. Check all the project’s social media handles for this sign.
This new data set will provide the most accurate analysis because it doesn’t rely on likes, shares, or active blockchain addresses.
Detect Fake Token Liquidity in Web3 Projects
These days, market makers are actually providing liquidity services for tokens. They can keep bids and offers at reputable exchanges for a certain fee, moving the price using algorithms based on the order flow.
Experienced investors will note subtle differences between fake volume and order book depth, indicating trading activity. A close look at the 2% depth on bids and offers provides an easy way to avoid illiquid tokens.
If you look closely, you will notice that the UFO Token shows a meager amount of bids compared to its daily trading volume. The aggregate demand from buyers is less than 0.6% of the reported trading volume and 2% below the last trade.
Market makers are usually good for trading, but it is important to note that this does not necessarily mean there will be more activity. When a token’s interest fades in the community, it can lead to an overall decrease in liquidity.
The Orchid Protocol token has been listed on Binance, Coinbase, and other exchanges, but it still sees $675,000 in daily volume. The 2% order book depth ranges between 9% and 47%. This seems quite off.
Conclusion
Investors should always be on guard against the skilled manipulation of venture capitalists and market makers. It’s almost impossible to find a top-200 coin at Binance with distorted ratios on daily volume and order book depth. The DAU metric is often misleading for popular Web3 and other DApps as it doesn’t accurately represent how many people use the app. By analyzing the platform’s social media accounts and codebase on GitHub, you can look into what is happening with your favorite cryptocurrency.
