A new report from Blockchain data aggregator CoinGecko says the NFT market recorded a 126% increase in wash…
A new report from Blockchain data aggregator CoinGecko says the NFT market recorded a 126% increase in wash trading in February compared to the previous month.
Although wash trading has always been a major concern in the NFT industry, this recent increase is a revelation because it corresponds with an overall recovery of global NFT marketplace trading volume, which has declined until recently.
For the uninitiated, wash trading is a process in which a trader buys and sells an asset solely for the purpose of giving fake or misleading information to the market.
In the NFT space, it is the process of making one’s NFT appear more valuable than it really is by “selling it” to a new wallet that the original owner also controls.
Note that this is easy with NFTs, as many NFT trading platforms allow users to trade by simply connecting their wallet to the platform, with no need for KYC verification.
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A major reason why wash trading is prevalent in the NFT space is that Smart Contract specialises in recording NFT activity. Every time a token is traded, the activity is recorded by its smart contract to be displayed to anyone who wishes to check in future. So by continually ‘trading’ an NFT, wash traders can create the impression that there is demand for that token when, in reality, there is not.
More on the CoinGecko report
CoinGecko says the top six NFT marketplaces saw a rise in wash trading, with a total volume of $580 million. The six marketplaces included in the report are Magic Eden, OpenSea, Blur, X2Y2, CryptoPunks and LooksRare.
X2Y2 ($280 million, 49.7%), Blur ($150 million, 27.7%), and LooksRare ($80 million, 15.1%) played the largest roles in February’s wash trading volume. These marketplaces previously incentivized users to increase trading volume via transaction rewards. Two other marketplaces, OpenSea and Magic Eden, recorded $42.57 million and $590,000, respectively. CryptoPunks did not see any NFT wash trading, per the CoinGecko report.
The most interesting part of this surge is that it happened in a month when global NFT sales volume skyrocketed to highs not seen since the onset of the crypto winter that started after the Terra crash. According to data from DappRadar, NFT trading surpassed $2.04 billion in February, up 117% from $941 million in January.
This makes one question if most NFT transactions are real. Late last year, Footprint Analytics applied their detection rules to the collections with the most trading volume on X2Y2 and LooksRare and discovered that 95% or more of the trading volume of these collections is wash trading transactions.
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This means that wash trading makes up an extremely high percentage of the trading volume for NFT collections. The plague paints a misleading picture of a collection’s historical volume and sale activities and is becoming one of the biggest impediments to accurately evaluating projects and assets in the NFT industry,
The instance of wash trading
One of the biggest examples of wash trading involves CryptoPunk, a collection of 10,000 unique and pixelated artworks built on the Ethereum blockchain. They are so popular that a few of them rank high on the list of most expensive NFTs ever sold.
In August 2021, CryptoPunk #9998 was purchased by a crypto wallet for around $350,000. On October 28 2021, the same NFT was transferred to a second wallet before being promptly “sold” for 124,457 ETH (around 532 million USD at the time). According to this interaction, the NFT had increased to more than a thousand times its original value in just two months.
But something happened immediately after the final sale: the NFT was transferred again to the original buyer from August and then re-listed for 250,000 ETH.
This shows that the sales and transfers made between August and October were all made by the same entity/person, and the set-up was a ceremonial hoax.
What can be done?
Although wash trading in most traditional markets in the United States is illegal, it remains difficult to enforce in the crypto space because of the pseudonymous nature of blockchain interactions.
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With how common it is, confirmed participants cannot be outrightly prosecuted because the NFT market is not subject to government regulation or supervision. There are, however, calls that platforms and NFT marketplaces should implement software to prevent or reduce wash trading.
Conclusion
There are some steps NFT enthusiasts can take not to fall victim to wash trading. It is important to look at past transactions of an NFT before making a purchase. If the same wallet address has purchased the token more than once, it may be a wash trading scheme.
There are blockchain explorer tools like Etherscan where traders can search the transaction history of tokens and wallets via public blockchain data.