Nonfungible tokens (NFT) have taken the world by storm, resulting in mainstream interest and greater adoption of cryptocurrency. According to blockchain analysis firm Chainalysis, NFT popularity skyrocketed in 2021. Chainalysis’ “NFT Market Report” shows a minimum of $44.2 billion worth of cryptocurrency sent to Ethereum smart contracts associated with NFT marketplaces and collections last year. The report notes that this number was $106 million in 2020.
While impressive, increasing scams and fraudulent activities have infiltrated the NFT space. For instance, major NFT marketplace OpenSea recently announced that its free minting tool was prone to misuse. As a result, OpenSea shared that 80% of NFTs created using this tool were either plagiarized, fake or spam. If that wasn’t bad enough, Chainalysis’ latest blog post highlighting its “2022 Crypto Crime Report” found that the NFT sector is vulnerable to wash trading and money laundering.
Wash trading in the NFT sector grows
According to the blog post, wash trading refers to a transaction in which a seller is on both sides of the trade in order to paint a misleading picture of an asset’s value and liquidity.
Unsurprisingly, wash trading has become a major concern within the NFT sector. Most recently, data generated from the LooksRare NFT marketplace found the platform to be very prone to wash trading.
Yet as wash trading becomes more common across NFT marketplaces, new solutions are being developed to detect fraudulent activity. Kim Grauer, head of research at Chainalysis, told Cointelegraph that the firm has created a potential tool capable of detecting individuals who are self-funding their own crypto wallets to conduct misleading transactions:
“By using Chainalysis software, we can see when a person buys a token using funds from the same person who sold them that very token. This is the definition of wash trading.”
The Chainalysis blog post further explains that by using blockchain analysis, the firm is capable of tracking NFT wash trading by analyzing sales of NFTs to addresses that were self-financed, meaning they were funded either by the selling address or by the address that initially funded the selling address.
Interestingly enough, while Chainalysis found that some NFT sellers have conducted hundreds of wash trades, Grauer pointed out that most NFT wash traders are in fact unprofitable. She said:
“Overall, we found that it’s not profitable to wash trade NFTs because you end up paying a lot in gas fees. Many wash traders came out negative due to the amount spent on gas versus the amount generated from their sales.”
More specifically, Chainalysis’ findings indicate that 152 Ethereum addresses associated with wash traders resulted in losses of $416,984. On the other hand, Grauer pointed out that some wash traders have been successful. Data from Chainalysis shows that 110 Ethereum addresses received $8.9 million in profits from wash trading.
According to Grauer, successful wash traders tend to be individuals conducting multiple NFT trades across a number of platforms. However, she noted that overall, it’s not a good idea to wash trade due to the high costs of gas fees coupled with the fact that all transactions can be seen across the Ethereum blockchain network. “This is a risky type of crime to carry out, and even riskier given that people have to pay large gas fees. Those who do this at scale have to be experienced,” remarked Grauer.
How NFT platforms can keep users safe
Although wash trading NFTs have proven to be risky and unprofitable for most, Grauer believes this activity will become more common as the NFT space continues to grow. “Anyone can easily engage in wash trading — if you can download an ETH wallet and purchase an NFT, you can do it,” she remarked. With this in mind, it’s becoming increasingly important for NFT platforms to enforce initiatives to help keep users safe from fraudulent activities.
Alex Salnikov, co-founder and head of product at NFT marketplace Rarible, told Cointelegraph that in terms of what the platform has seen in the broader NFT ecosystem, there tends to be a pattern of users wash trading on platforms that provide incentive rewards for trading. To Salnikov’s point, the LooksRare platform planned to offer user rewards in the form of the platform’s native token, which could have added to the amount of wash trading on the platform.
Salnikov explained that after realizing this vulnerability, the Rarible decentralized autonomous organization voted to stop RARI token distribution to Rarible users. As a result, “the issue is no longer relevant for our marketplace,” he said, adding that in order to further protect Rarible users, the platform has released a verification system that allows the Rarible team to manually review a creator’s profile. Salnikov elaborated:
“If this process is successful, the user will earn a yellow checkmark on their Rarible marketplace profile. It is…
cointelegraph.com