Wash trading on nonfungible token (NFT) marketplaces is back in the spotlight after critics claimed the fast-growing NFT marketplace Blu
Wash trading on nonfungible token (NFT) marketplaces is back in the spotlight after critics claimed the fast-growing NFT marketplace Blur has incentivized the practice with its trading rewards scheme.
10% of Blur’s total token supply was distributed to users based on their trading activity in its second token reward scheme from Feb. 14. The platform has seen a surge in trading volume in comparison to other leading NFT marketplaces.
Skeptics claim that wash trading played a significant role, with CryptoSlam reporting around $577 million worth of NFTs have been wash traded back and forth in recent months and that 80% of trades on the platform are “inorganic.” However, opinions vary.
A new Dune Analytics deep-dive by Hildobby argues that the vast majority of the platform’s trading volume is actually above board due to the way it has structured the rewards. But the analysis is far from a clean bill of health for the sector, with the same methodology suggesting that LooksRare and X2Y2, have 98% and 85%, respectively, of volume currently flagged as suspicious.
NFT marketplaces have accounted for a reported $73.8 billion worth of trading volume to date. However, Dune Analytics data suggests that more than 42% of the volume is fake, with $31.2 billion attributed to wash trading.
The effects are wide-ranging. Inflated prices and manufactured popularity of certain collections have left inexperienced digital collectors as collateral damage. And in some cases, criminals have been using NFTs as a means of money laundering.
There is some good news for more educated collectors, however, in that most wash trading surrounds the type of NFT collections favored by inexperienced or low-information collectors.
“Sure, in absolute terms, there is a lot of wash trading, but it mostly is happening to NFT collections with a poor reputation anyways.”
What is NFT wash trading?
Wash trading itself is not a new phenomenon. The term has its origins in the early 1900s, where the practice of “wash sales” in the United States was carried out by selling a security prior to the end of the tax year to claim a loss and then buying them back straight after.
Wash trading in crypto is an offshoot of those early practices, whereby individuals or colluding parties buy and sell a particular financial asset among themselves to create the perception of higher trading volumes or liquidity. Exchanges and projects do it mainly to make themselves look more popular.
It’s important to note that wash trading is illegal in a number of jurisdictions around the world and is prohibited by major regulatory institutions. Considered a form of market manipulation, the practice is harmful to investors and is a threat to the integrity of financial markets.
Given that the cryptocurrency space is still fairly nascent, regulators are still coming to grips with the ins and outs. This leaves crypto and NFT wash trading in a gray area where the practice is unchecked and ungoverned. However, President Joe Biden has proposed closing the loophole that made the practice not illegal for crypto assets in the U.S. in the upcoming budget.
Research carried out by analysts and insights provided by industry experts to Cointelegraph Magazine suggests wash trading is ongoing across a number of NFT marketplaces.
NFT wash trading and money laundering
Hildebert Moulié is one such expert, whose in-depth research brought NFT wash trading into the spotlight in late 2022. By day, Moulié is a data scientist working for cryptocurrency investment firm Dragonfly. In his spare time, Moulié built a data dashboard that has lifted the veil on wash trading in the NFT space.
His popular post on Dune late last year found that around 80% of the total NFT trading volume in January 2022 resulted from wash trading, and that figure averaged around 58% for the totality of 2022. Moulié’s method for routing out wash trading made use of four specific filters.
Firstly, addresses that were both the buyer and seller of a specific NFT were flagged. The second filter identified back-and-forth trades between two different wallets. If an address had purchased the same NFT three or more times, it was also identified as potential wash trading. The final filter was used to identify addresses or trades that sidestep the above-mentioned methods by checking if the buyer and seller addresses were funded by the same wallet.
After applying all these filters, Moulié’s data reveals that 42% of NFT trading volume is currently driven by wash trading across 29 major NFT marketplaces operating today.
Blockchain…
cointelegraph.com