Token teams are paying for inflated volumes, but this tech company is helping traders spot them

Quick Take

  • FRST, a Chicago-based blockchain data provider, has raised $3.4 million
  • It provides technology to help trading firms distinguish between real volumes and inflated volumes
  • In crypto, firms sell services to make certain coins or exchanges appear more liquid

In crypto, there are three kinds of lies: lies, damned lies, and market data. 

Cryptocurrency markets are notoriously untrustworthy. Popular data aggregators, which paint a picture of the market for traders, notably ignore anomalies, such as wash-trading and pay-for-play arrangements between small cap coins and digital currency exchanges. 

Wash trading, the creation of artificial trading activity, is illegal in some jurisdictions, including the U.S. And it impacts more than 67% of the cryptocurrency market, according to the Blockchain Transparency Institute. In some cases, immature token projects pay exchanges to get listed. And there are some firms selling services to token teams and exchanges to inflate volumes, according to marketing materials reviewed by The Block.

“We make volumes on any exchanges where you are listed,” marketing materials by one firm said. “Your project becomes more and more prestigious because of good trading volumes and CoinMarketCap listing. “One firm, Token Boost, offers wash trading packages. A token team can purchase up to $100,000 worth of volumes a day for $4,000 a week from the firm, according to its website.

The CEO of FRST, a Chicago data technology provider, says the lack of tools to identify this type of activity has kept some trading firms from diving into the nascent market.

“There are a lot of companies out there who say they would love to move a foreign exchange guy to build a new crypto desk, but they are generally unsatisfied with the tools,” Karl Muth, chief executive officer of FRST, said. The firm recently announced it raised $3.4 million to build out its team. Investors include CMT Digital and Vestigo Ventures, the firm announced. 

Through a desktop application, the firm offers trading solutions to answer portfolio-related questions or backtest, which allows client trading firms to conclude whether a given strategy would have outperformed the market over a certain historical time-period to test the strategy’s efficacy. The firm’s tools tap into more granular data which can help traders distinguish between volumes that are inflated by wash trading and those that are not. 

Muth told The Block that FRST’s data has identified a specific type of wash trading in which exchanges, or other entities, send coins back and forth between wallets to inflate the volumes on a given exchange venue or for a given token. 

“This activity — wash — will show up as on-chain, legitimate volume and will ‘fool’ traders’ triggers and algorithms that have threshold volume variables,” Muth said. 

One exchange, he noted, does treasury rebalancing at the end of the day which shows up as volumes. Traders using FRST’s platform can suppress these types of volumes because it identifies wallets that are related to each other. 

“FRST’s technology to identify which wallets are related — and distinguish between movements of tokens among wallets that are closely-related and unrelated, traders can set rules and build models that excludes related-party activity and more accurately portray the amount of market activity in a given token,” Muth said. 

To be sure, Muth says some trading shops have been able to replicate some of these features. Notably, firms such as DRW and DV Trading in Chicago, have been trading in crypto markets well-before the bitcoin mania of 2017. Still, FRST has a sweet-spot in the middle-market, especially among firms that aren’t necessarily trading crypto. 

“Many of these firms don’t have the [research and development] budget or dedicated engineering team to build out a lot of these capabilities,” he said.

FRST, which was founded 2017, has a team of 19 people and it is actively hiring developers.