Active User Count Can Be Misleading in Crypto Ecosystems, Says Blockchain Analytics Provider
Active user count can be a misleading metric for measuring the state of a crypto ecosystem as a small group of users can generate a significant portion of activity across multiple wallets, argues the co-founder of a blockchain analytics provider.
80% of Blockchain Activity Generated by a Small Number of Entities
0xScope’s co-founder and chief data scientist, Philip Torres, told Cointelegraph that between monopolistic founding entities, bots, exploiters, and airdrop hunters — as much as 80% of blockchain activity can be generated by just a small number of entities — despite looking healthy on the outside.
Entities Controlling Multiple Addresses
“These projects make a claim such as ‘we have 10,000 active users’ — well, we find out using the entity model that you have about 10 to 20 different users that are controlling 10,000 different addresses,” he added.
Multiple Wallet Addresses
“The way they operate on-chain is that one single person can have 10,000 addresses or more, and then it would seem to the outside observer as if those were 10,000 different people,” Torres explained.
Not Limited to Small-Scale Ecosystems
The phenomenon isn’t only present in small-scale ecosystems, Torres claimed — essentially all blockchain ecosystems see varying levels of the activity.
Legitimate Reasons for Multiple Wallet Addresses
Torres noted there are legitimate reasons why a user would have multiple wallet addresses. It could be due to privacy concerns or automated traders deploying multiple strategies on-chain.
Malicious Use of Multiple Wallet Addresses
However, it has also been used for malicious purposes such as inflating a project’s active user numbers to mislead potential investors, creating a Sybil attack, or users trying to game an upcoming token airdrop.
Example of Airdrop Farming
One example came from the anticipated Arbitrum (ARB) airdrop on March 23 which saw two wallets amass 2.7 million ARB from 1,496 wallets in a strategy known as “airdrop farming.”
Controlling Multiple Public Addresses
“On blockchain, it’s very easy to control multiple public addresses,” Torres noted.
Creating and Controlling Multiple Crypto Wallets
Torres explained unlike email addresses, creating and controlling multiple crypto wallets isn’t too complicated if you know what you’re doing. Some use what is known as HD wallets — hierarchical deterministic wallets — which generate a new key pair from a master key pair.