Efficacious methods to tackle wash trading with NFT Marketplaces

What is Wash Trading?

When traders engage in a wash trade, they buy and sell securities to create a misleading market signal. When traders and brokers collude, they can make wash trades. Investors can also make wash trades if they act as buyers as well as sellers.

  • Purchasing assets or rights to create false publicity for a publisher, artist, or platform
  • Artificially inflating metrics by purchasing assets
  • Collecting rewards with assets that are more valuable than the cost-of-attack

How does Wash Trading happen with NFTs / NFT marketplaces?

Many buyers pay large amounts for the right to acquire virtual collectibles in the form of NFTs, which give them exclusive ownership of digital assets. Why these unique digital tokens have sold for such a high price is a concern for many people.

Examples of Wash Trading

A wash trade has no commercial value and cancels the other out. The LIBOR scandal used wash trades to pay off brokers who used the LIBOR submission panels to manipulate the Japanese yen. UK authorities alleged that they executed nine transactions with a brokerage firm to generate 170,000 pounds as compensation for its role in LIBOR rate manipulation.

Why is it a problem in the NFT marketplace?

Regardless of who is involved, illegitimate/wash trading is detrimental. Whether for projects themselves, traders, investors, or a global network of enthusiasts.

Investors

Due diligence becomes increasingly challenging as investors rely on measurable statistics. Specialists must review the data for discrepancies.

Collectors and traders

They can’t make an informed decision. It is easy for users to draw uninformed conclusions when misled by inaccurate statistics and history about a piece of art or collectible.

Global Community

Amongst the most affected is the community as regulations and mainstream financial services proponents can now use wash trading to argue against decentralization. As we accept more social norms (property rights, financial practices, marketing strategies, etc), the technology will be adopted and more widely accepted.

How is Wash Trading identified?

Early detection is primarily achieved through the use of graph clustering and nearest neighbor algorithms. However, a related phenomenon called “collusive cliques” has also been researched.

Detecting wash trading the Scour way!

With Scour, fraudulent activities can be identified with higher precision and practicality. However, with multiple methods to wash trade, wash traders continue to come up with new ways to wash trade, even when caught. Thus, new wallets are created to try new methods.

How does bitsCrunch’s knowledge graph provide a solution to Wash Trading?

Even though NFTs are easily distinguishable, the holders’ identities are still anonymous, making fraud detection difficult. To overcome this, Scour is upgraded every week to keep data relevant and up to date, so new possibilities and methods of wash trading can be detected and prevented through in-depth analysis on all NFT marketplace activity.

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