Wash trading in NFTs Explained: Plus Some Bonus Tips
Ethereum has grown in value continuously since its launch and is expected to grow even further with the Eth2 merge.. The total number of smart contracts created in Q1 2022 was 1.45 million smart contracts.
The market value of Ethereum has significantly grown. From roughly $15 billion in January 2020 to a whopping $180 million as of September 2022, the growth was largely driven by the emergence of non-fungible tokens (NFTs), Decentralized Autonomous Organizations (DAOs), and Decentralized Finance (DeFi). The role of NFTs in this significant growth is undeniable.
However, like with any other technology, the more NFTs became popular, the more the industry became vulnerable to threats, fraud, and counterfeits. Today, individuals relying on novel methods to extract illicit value out of NFTs are quite rampant. One of the most common methods scammers employ is wash trading in the NFT industry.
According to a report by bitsCrunch, in January 2021, the total volume of the LooksRare marketplace was 24.8 Billion USD, out of which volume worth 21.4 Billion USD was wash traded. The Terraforms collection hosted on the LooksRare marketplace accounts for nearly 89% of the wash traded volume on the platform.
Since then, the marketplace is facing intense scrutiny from prominent market analytical platforms such as Dune and DappRadar. When platforms even as big as LooksRare are prone to such levels of wash trading, it’s better to be safe than sorry. Hence, in this blog, we discuss everything related to NFT Washtrading and how bitsCrunch is emerging as a true saviour of the NFT ecosystem.
What Is NFT Washtrading?
Wash trading isn’t a new notion. In finance, it has been used to influence prices for years in the stock market by selling them at a high price to accounts that they control. Now with the emergence of the NFT industry, scammers are using the same form of market manipulation scheme for their illicit benefits.
In wash trading, the value of an asset is increased after a trader sells their own NFTs for a higher price. Then, that NFT is frequently sent from one wallet to another and then back to the original wallet. So, how does it affect retail investors looking to get started in the NFT space? Read along as we discuss it below.
How is it dangerous?
Since there is no method to predict and analyse the nature of NFT transactions, NFT wash trading can potentially influence investors into believing that a project is in high demand. Most of these investors aren’t aware of the transaction’s cyclical nature. For instance, bitsCrunch found that the Cryptopunks collection was inflated by 24.22% due to high levels of wash trading. The same NFT was initially trading for a much lesser price.
In the NFT ecosystem, there is a lot of anxiety about missing out on NFT projects. No one can accurately estimate the potential of any particular project. Following the success of Bored Ape Yacht Club and several other NFT ventures, investors are looking to buy the next big asset before it becomes widespread. The surge in demand has led to an increase in the production of NFTs and consequently increased the influence of scammers.
As a result, NFT wash trading has become rampant in several marketplaces, with a bitsCrunch report suggesting that nearly 34% of the total transactions were found to be wash traded in the Ethereum blockchain in 2021.
Trends in NFT Wash Trading
As NFTs derive value and use cases from each sector, their popularity will only increase. The market value of the NFT industry is, thus, estimated to reach $80 billion by 2025. At the same time, undermining the increase in NFT scams would be disastrous for users. Below are some of the market trends observed by bitsCrunch:
- In 2021, nearly 34% of the total transactions were found to be wash traded in the Ethereum blockchain.
- The Terraforms collection hosted on the LooksRare marketplace accounts for nearly 89% of the wash traded volume on the platform.
- Token ID 3083 from the Terraforms collection has been traded around 128 times, with nearly 181 million USD in total revenue involved.
- In January 2021, the total volume of LooksRare marketplace was 11.6B USD, out of which volume worth 10.6 billion USD was wash-traded.
- The CryptoPunks collection has seen inflation of 24.22% due to wash trading.
- The Bored Ape Yacht Club collection saw inflation of 39.44% due to wash trading.
- The most expensive wash-traded Ape is Ape#2087, which sold for a whopping 2.1 million USD as of April 2022. Similarly, nearly 84.42% of the volume of the Meebits collection is wash-traded.
The report further suggests that fraudulent transactions leading to market manipulation usually trap new investors who are solely driven by price fluctuation. This fluctuation is spoofing trading that scammers are undertaking emphatically now. Once a user buys a high-priced NFT, its value substantially decreases due to lesser transaction activity and demand in the marketplace. Are you wondering how wash trading affects retail investors, collectors, and NFT marketplaces? Read along to find out the outcomes of wash trading.
The Outcome of Wash Trading
Since fraudsters mostly hyper-inflate less valuable NFTs and manipulate their demand, NFT wash trading is a massive problem for investors, collectors, traders, and the global community.
- Without account verification, anyone can sell NFTs simply by attaching their wallet and paying the appropriate gas fees.
- Extensive trading of manipulated NFTs creates an unfair market that becomes dangerous and leads to reduced confidence in the future viability of the systems, affecting the entire ecosystem.
- As there are no regulations placed against wash trading, such illegal activities will only increase, affecting NFT marketplaces and the wider NFT ecosystem.
Scams like wash trading will escalate despite the current measures imposed by platforms and decentralised authorities. Thus, criminal activity may continue to advance until an industrial-wide solution is developed. You may need to take additional precautions, such as doing your own research, to detect and avoid fraudulent behaviour on NFT platforms.
Else you can also leverage the revolutionary tools that facilitate a smooth NFT marketplace experience. Wondering what might that be? Read along.
bitsCrunch: Guardians of The NFT Ecosystem
bitsCrunch is a blockchain research and analytics company focused on artificial intelligence systems that prevent scammers from exploiting NFT marketplaces and projects.
We seek to create more trust and transparency in the current Web3 environment as concerns about security, decentralisation, and volatility continue to persist. bitsCrunch strives to provide a trusted and consistent experience for (NFT) marketplaces and their users with its all-in-one forensic solution with customizable risk management tools that detect NFT fraud and provide detailed analytics on trending NFT projects.
- Unleash NFTs
UnleashNFTs is a portfolio tracker and NFT analytics dashboard that updates users in real-time.
Scour is an AI-enhanced safety feature that recognizes spoofing transactions affecting asset volume and price in the B2B NFT ecosystem.
Liquify is an AI-powered fair value assessment and analytics platform for digital assets (NFTs), empowering the community to accept and value their assets in real-time B2B.
- Crunch Da Vinci
Crunch DaVinci is a forgery detection system that allows artists to detect forgeries, copycats, and bootleg digital art content.
Reliance on NFT marketplaces is faltering as investors are being forced to rely on numerical numbers, leading to poor investment decisions. To encourage NFT investments and avoid NFT fraud, specialists need to evaluate data discrepancies.
On the other hand, collectors and dealers are unable to make informed choices. When manipulated facts and history mislead people about a work of art or collectible item, it’s easy for them to jump to hasty conclusions. Is there a way to spot wash trading before it affects the NFT markets?
Like cryptocurrencies, the NFT market is highly speculative. With no proper mechanisms in place to save NFT investors from a broader landscape, bitsCrunch acts as the defender of the NFT ecosystem. The several offerings of bitsCrunch allow people who are still hesitant to invest in NFTs to regain their confidence.
It also gives investors insight into the ecosystem by numerically outlining the number of wash trades and copycats existing in the NFT ecosystem. Check out our other blogs and stay tuned on our social media handles for further updates or more information.