The co-founder of a blockchain analytics provider believes that the number of active users can be a misleading indicator of the state of the crypto ecosystem, as a small group of users can generate a large portion of activity across multiple wallets.
Philip Torres, co-founder and chief data scientist at 0xScope, told Cointelegraph at the Bitget EmpowerX Summit that between monopoly founding entities, bots, exploiters and airdrop hunters, as much as 80% of blockchain activity can be generated by a handful of entities — Despite looking healthy on the outside.
“These projects claim ‘we have 10,000 active users’ – well, what we found through the physical model is that there are about 10 to 20 different users controlling 10,000 different addresses,” he added.
“The way they work on-chain is that one person can have 10,000 or more addresses, and then to an outside observer, those addresses appear to be 10,000 different people,” Torres explained.
Torres claimed that this phenomenon does not only exist in small-scale ecosystems, but basically all blockchain ecosystems have varying degrees of activity.
He found that the average Ethereum user has at least 10 addresses, adding that “everything that happens on the chain is not what it seems.”
Torres noted that there are valid reasons for users to have multiple wallet addresses.
“One of them could easily be explained as a ‘privacy issue’. People like to have different addresses just to not leave a big enough footprint,” he explained.
This could also be due to automated traders deploying multiple strategies on-chain.
“So when we see automated trading on-chain, typically each address is very much focused on a different protocol or a different exchange, or trading different tokens or using different strategies to trade different tokens.”
However, it has also been used for malicious purposes, such as inflating the number of active users of a project to mislead potential investors, creating Sybil attacks (also known as 51% attacks), or users trying to game upcoming token airdrops.
One example is the anticipated Arbitrum (ARB) airdrop on March 23, where two wallets raised 2.7 million ARB from 1,496 wallets through a strategy called “airdrop mining.” By comparison, the median airdrop size is expected to be just 1,250 ARB tokens, according to CoinMarketCap.
We found 2 super airdrop hunters $ARB.
0xe1e2 received 1.4M $ARB($1.92M) Pass 866 addresses and add all 1.4M $ARB arrive #Uniswap Provide liquidity. https://t.co/sncsZTHrP2
0xbd4e received 933,375 $ARB($1.28 million) through 630 addresses. https://t.co/p5vbqXMYxD pic.twitter.com/yK3LzbeC8t
— Lookonchain (@lookonchain) March 24, 2023
“On a blockchain, it’s very easy to control multiple public addresses,” Torres noted.
related: The number of Shibarium wallets exceeds 1 million, but SHIB has yet to catch up
Torres explained that unlike email addresses, creating and controlling multiple crypto wallets is not overly complicated if you know what you are doing.
Some use so-called HD wallets (hierarchical deterministic wallets), which generate new key pairs from a master key pair. Simply put, it is a method of generating multiple public addresses from a master set of mnemonics.
“It is very easy for one person to control multiple wallet addresses compared to [how]Often, people only have a few emails,” he added.
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