Cryptoasset Data Challenges
What crypto data is off the chain and why does it matter?
When trading traditional securities, financial institutions (FIs) have always thrived on reliable market data from a plethora of standardised and centralised data providers and channels.
However, obtaining cryptoasset data presents fundamental differences and challenges for FIs compared to traditional securities, which could hinder institutional confidence and subsequent adoption of cryptoassets.
Access to crypto market data is still largely fragmented and opaque, with the unregulated nature of the crypto market making it difficult for institutional players to tap into and fully understand blockchain and pricing data in order to make fully informed investment decisions.
To understand the crypto data problem, it is necessary to understand the makeup of cryptoasset data.
Cryptoasset data has similarities to traditional securities data. As one would expect, pricing still plays an important role, with historical and real-time price data of cryptoassets readily available across crypto exchanges, and typically accessed by FIs through vendor-based application programme interfaces.
However, typically, there is no authoritative source for primary data such as cryptoasset prices, as these are quoted differently on various centralised and decentralised exchange platforms. Data from centralised and decentralised exchanges and OTC venues is incredibly diverse with each platform calculating price data in their own way, often providing significantly larger arbitrages and volatility than seen in the traditional finance world.
Also, there is no standardised taxonomy for digital assets. For example, most exchanges, but not all, will use ‘BTC’ to denote Bitcoin. Others may use ‘wBTC’ which represents wrapped Bitcoin. Wrapped Bitcoin is native to the Ethereum blockchain - Ethereum is the second largest cryptoasset by market capitalisation. In addition, some cryptoassets are quoted with as many as eight decimal places, which is far more than the two or sometimes three decimal places used to denote equity prices. Substantially more normalisation and infrastructural adaptions are required for FIs seeking to increase their exposure to cryptoasset markets compared to traditional markets. While there are several specialist cryptoasset data vendors seeking to restore some formality, such as Kaiko, Talos and Amberdata, there is still a long way to go before industry-wide standardisation is achieved.
However, cryptoasset data extends further than just pricing, with crypto transaction data arguably carrying greater importance and revealing far more about the true fundamentals of a cryptoasset network than price data. However, cryptoasset transaction data also carries problems.
There are two types of crypto transaction data; on-chain and off-chain transactions.
On-chain transactions refer to a transaction that is carried out on a blockchain network, such as Bitcoin for example. When two parties want to trade a particular cryptoasset, information about the transaction is encrypted, processed and time-stamped on a digital ledger called a block. That block then appears on a blockchain network where it waits to be validated by computers in the network called nodes, before being added to the blockchain. This information is publicly available and is immutable.
Analysing this data can involve monitoring transactions, trades and wallet addresses and get an understanding of the actions of market participants on respective blockchains in real time. Market participants are able to get insight into who is holding or trading specific cryptoassets, how sophisticated actors are positioning their portfolios, and how token holders are reacting to market events. However, as stated, this data is not always readily available and is scattered across several exchanges. Ultimately, from an infrastructural standpoint, firms are typically faced with a piecemeal approach when it comes to configuring, collecting and consolidating data, rather than a centralised, singular data location, making it harder to derive meaning from the data.
In addition, obtaining off-chain data also comes with challenges. Off-chain data refers to transactions that occur away from the core blockchain of a particular network, on secondary, ‘layer 2’ blockchains. Off-chain transactions operate by establishing crypto payment channels between two parties that allow for an unlimited number of transfers without using blockchain space. For example, if an institution sends or routes a cryptoasset to an exchange (and corresponding exchange wallet), this is recorded on the blockchain and is hence an on-chain transaction. However, once on the exchange, and the cryptoasset holder partakes in the buying and selling of cryptoassets, this is known as an off-chain transaction and is not visible on the blockchain. As such, this can create a transparency issue, with a lack of visibility on what buying and selling activity is occurring within an exchange. Subsequently, FIs may not have full access to all the necessary data, and are placing a lot of trust in entities that may or may not be keeping accurate records, and for all they know, partaking in illicit activities. This inevitably brings regulatory concerns for FIs engaging with this type of data.
Understanding and addressing these data bottlenecks opens the crypto industry to greater institutional adoption. Ideally, FIs need to actively manage and monitor their cryptoassets in relation to market trends, combining a single view of all the assets in their portfolio with accurate real time, on-chain and off-chain cryptoasset data. While there are a handful of technology vendors seeking to meet these urgent industry data needs, institutional data solutions are still in their infancy in terms of consistency, conformity and coverage.