The decentralized application (DApp) industry pushed above $40 billion in smart contract deposits in February 2021, and currently, the figure stands at $59 billion. To date, “real money” continues to flow into the sector, and on Aug. 29, gaming startup Limit Break raised $200 million. The project gained popularity after the successful launch of its DigiDaigaku free-mint NFT collection.
According to a report by Dove Metrics and Messari, the crypto industry saw $30.3 billion in funds raised in H1 2022. This amount surpassed the $30.2 billion seen in 2021. Excluding the $10.2 billion in funding raised for the centralized finance sector leaves a whopping $20 billion that was invested in DApps, nonfungible tokens (NFTs) and Web3 infrastructure.
One might question how much of that money has been deployed effectively or reinvested in ventures owned by the same investment groups. Of course, there are a handful of clever ways to overextend those announcement numbers without violating any regulations, but there's undoubtedly a great deal of money flowing toward decentralized applications.
There’s always been a healthy amount of distrust in the actual number of active users on DApps, but so far, no hard evidence of cheating has been presented. So what tools can retail users employ to detect inflated activity? Well, it turns out there are at least three: active users, community engagement and liquidity.
Comparing registered users to active users
Most proof-of-stake (PoS) networks charge minimal registration fees and many are free to use. This leads to troves of “fake” active addresses that interact with the DApp and it creates incentives for developers and investors to boost their numbers.
Filtering the DApps rankings by the number of users brings some staggering data, especially in the Tron, WAX, Flow, EOS and Thundercore networks. Some of the DApps claim to have more active users than industry leaders like OpenSea, Uniswap and Axie Infinity.
Levan Kvirkvelia, the co-founder of Jugger, a Web3 bot prevention service, analyzed over 60 games and DApps and found that 40% of tactive users are actually automated bots or single entities controlling multiple accounts.
after analyzing 60+ games and services, we found 200 000 bots. on average, every web3 game has 40% bots.— Levan (@LevanKvirkvelia) August 29, 2022
link to the database with the results at the end of a thread pic.twitter.com/vvvuhgeRLV
In some cases, such as the AnRKey X game on the Polygon network, the ratio of bots to holders reached 84%. Even though there could be a plausible explanation for distancing the project developers from the bot deployment, Kvirkvelia's research shows that analysts should not use the number of tokenholders as a proxy for active users.
Faking community engagement is incredibly hard
A sign to look out for is inconsistent community engagement on the project's social networks even if the DAU metric is high. Well funded projects aim to “buy” real users whereas bots are not skilled enough to contribute to discussions in a meaningful and consistent way.
This analysis doesn’t take longer than 10 minutes because it only requires one to log in to the official group and scroll through the last 40 or 60 messages. Are there real questions and constructive debates by the community or merely activity from group admins and shilling from bot accounts?
Moving on to the project's official Twitter, Twitch, YouTube or Instagram page, follow the same process of reviewing posts and comments from the community. This qualitative data should yield a far more accurate analysis versus the number of shares, likes or active blockchain addresses.
Detecting fake token liquidity
Believe it or not, market makers offer liquidity services for tokens. For a certain fee, they can keep bids and offers at reputable exchanges at all times, moving the price using algorithms based on the orderflow.
An experienced investor will note nuances that distinguish fake volumes and order book depth from actual trading activity. For starters, analyzing the 2% depth on bids and offers provides an easy way to avoid illiquid tokens.
Notice how the UFO Gaming token holds an unreasonably low amount of bids compared to its daily trading volume. The aggregate demand from buyers is 2% below the last trade and is less than 0.6% of the reported trading volume.
While having a market maker is usually a good thing since it encourages users to trade the token actively, it does not necessarily translate to trading volume. Dissipating interest from the community eventually causes the token liquidity to plunge.
The example above shows Orchid Protocol token, which despite being listed on Binance, Coinbase, Kraken and Kucoin, amasses $675,000 in daily volume. This effect causes the 2% order book depth to range between 9% to 47% of the daily trading activity, which sounds quite off.
Investors should be aware that venture capitalists and market makers are becoming even more skilled at hiding their manipulation. For instance, finding a top-200 coin at Binance with distorted ratios on daily volume and order book depth is almost impossible. Traders, gamers and investors should take care not to be misled by thehigh DAU metrics for popular DApps. Doing a qualitative analysis of the platform’s social media accounts and GitHub is a great way to cross-reference on-chain and trading data.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.