Transparency and integrity are fundamental values of every blockchain ecosystem, and the XRP Ledger is no exception. One such mechanism is the use of Source Tags, widely used to help track user activity within the dApps on XRPL. However, recent observations suggest that Source Tags may be susceptible to misuse, potentially leading to distorted metrics and undermining trust within the ecosystem. This article examines the usage of Source Tags, explores concerns around potential metric inflation, and uses Dexfi, a dApp and XRPL Grant recipient, as a focal point for this investigation.
Understanding Source Tags and Their Current Purpose
Source Tags on the XRPL serve as unique identifiers for transactions originating from specific dApps. They enable both users and developers to track how applications are being utilized, providing insights into user activity, trading volumes, and overall engagement. This information is crucial for developers aiming to improve their applications and for stakeholders evaluating the success and potential of different projects.
Here is an example how XPMarket uses Source Tag to aggregate the data on the activity of XRPL dApps. https://xpmarket.com/dapps/top
Potential Misuse of Source Tags: Manipulating Perceptions
While Source Tags have a valuable purpose, there is a possibility for misuse. Without stringent controls on their usage, there is a risk that metrics such as user numbers and transaction volumes could be artificially inflated. This could inadvertently mislead users and stakeholders about the popularity and activity levels of a dApp, potentially affecting decision-making and trust within the ecosystem.
Case Study: Dexfi and the Token Nex Anomaly
During routine data analytics on the XRPL, we observed unusual activity associated with Dexfi. Our key observations are as follows:
Token Nex's Limited Holders: We identified a token called Nex, which has approximately 50 holders. View Token Nex Details
Concentrated AMM Pool Activity: The Nex/XRP AMM pool has only one liquidity provider. A group of wallets associated with Dexfi’s Source Tag engage with this pool, collectively generating between $40,000 and $50,000 in daily trading volume. View AMM Pool Details
High Transaction Volumes Among Linked Wallets: In August, 47 of these wallets made between 600 and 632 payment transactions related to AMM trading, and one wallet made 2,284 AMM deposit/withdraw transactions. These wallets appear to be linked to a common origin.
Click here to view the full list of wallets and transaction counts.Impact on Dexfi's Overall Activity Metrics: In August, Dexfi saw a total of 523 unique wallets interacting with the platform. The wallets in question represent almost 10% of the total user activity. The median Dexfi user makes about 3 transactions per month. The average (mean) number of transactions per user is 28 per month when including all wallets. However, if we exclude the wallets in question, the average drops to 16 transactions per month.
Let's analyze statistics from DappRadar, an unbiased third-party data aggregator. From the chart, we can see that Dexfi consistently retains trading volume close to $100,000 per day. We can also observe spikes in both user activity and trading volume, which do not correlate with one another.
This data aligns with what we observe in the AMM pool on XPMarket. Note that the liquidity in the pool is about $15,000, while the trading volume that goes through it exceeds $40,000. This is an unprecedented pool performance that is rarely observed in other cases. Also, notice how, with such significant volume, the price of the token stays within a narrow range of 5 XRP.
This indicates that the wallets in question are engaging in significantly higher transaction volumes compared to typical Dexfi users. Their activity notably skews the average transaction volume, suggesting that their behavior is not representative of standard user activity on the platform.
Dexfi’s Explanation and Ongoing Concerns
We reached out to Dexfi for clarification on this activity. Dexfi responded that the transactions were part of testing and preparation for a new feature, involving approximately 24 beta testers. They emphasized that using Dexfi's Source Tag was important for their testing purposes and that the wallets involved are real users.
While we acknowledge Dexfi's explanation, we believe further clarification is needed to fully address the concerns:
Testing Practices: The transaction volumes observed are significantly higher than typical user activity. It would be helpful for Dexfi to provide more detailed information on their testing protocols and why such high volumes are necessary.
Impact on Public Metrics: Since these activities contribute to publicly reported metrics, there's a risk of misinterpretation by users and stakeholders. There was no clear explanation provided on the reasons why the main project's Source Tag is required for tests.
Implications for the XRPL Ecosystem
The potential for Source Tag misuse raises important considerations:
Accuracy of Performance Metrics: Artificially inflated metrics could mislead users and stakeholders about a dApp's performance, potentially influencing investment decisions and resource allocation.
Trust in Due Diligence Processes: If grant recipients can unintentionally inflate their reported metrics, it may impact the perceived effectiveness of due diligence processes within programs like XRPL Grants.
Enhancing Transparency and Security
To address these challenges, several steps could be considered:
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Review of Source Tag Controls: Exploring ways to enhance the control and verification of Source Tag usage could help ensure metrics accurately reflect genuine user activity.
- Is there potential to implement verification mechanisms, utilize Decentralized Identifiers (DIDs), or develop a new alternative mechanism?
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Separation of Testing and Production Metrics: Implementing practices where testing activities are conducted in a manner that does not impact public metrics could prevent confusion.
- Could Dexfi and other developers use test networks or flag test transactions to differentiate them from regular user activity?
Community Engagement and Monitoring: Encouraging open communication between dApp developers, users, and the broader community can foster a collaborative approach to maintaining transparency.
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Revisiting Key Performance Indicators (KPIs): Revisiting the KPIs associated with XRPL Grants to include qualitative metrics alongside quantitative ones may reduce the incentive for metric manipulation. This could involve:
- Emphasizing user engagement quality by focusing on metrics that reflect user satisfaction and meaningful interactions rather than just transaction volumes.
- Implementing regular audits and reporting to ensure alignment with grant objectives.
Conclusion
The observations around Dexfi's activity highlight the importance of transparency and accurate reporting within the XRPL ecosystem. While testing and development are essential for innovation, ensuring that such activities do not inadvertently affect public perceptions is crucial. By working together to enhance controls and communication, stakeholders can uphold the integrity and trust that are foundational to the XRPL's success.
Invitation for Further Discussion
We encourage Dexfi and other stakeholders to engage in open discussions on how to address these concerns collaboratively. Sharing best practices and developing guidelines for testing and metric reporting can benefit the entire XRPL community.
Note: This article aims to promote transparency and constructive dialogue within the XRPL ecosystem. The observations are intended to encourage collaborative efforts to enhance the integrity and trust that are vital for the community's success.
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