Published on: 26/12/2022
Ethereum has over 58% of total NFT wash trading, research suggests
According to Dune Analytics researchers, NFT wash trading has been at an all-time high in 2022. Over half of the total NFT trading volume on Ethereum is wash trading.
Wash trading is a market manipulation tactic that has long been a problem in the NFT market. It is an illegal activity in which a single trader buys and sells the same financial instrument to create misleading activity in the marketplace.
On December 16, a researcher known by the pseudonym Hildobby published a study that indicated more than 58 percent of NFT trading on Ethereum in 2022 was fake. January appeared to be the peak of this activity, accounting for over 80 percent of the total NFT trading volume.
I made an open-source wash trading filter available for all to use on Dune v2 and managed to flag $30B of NFT wash trades – that's ~44% of volume traded 🤯
— hildobby (@hildobby_) December 16, 2022
Hidobby used four filters to identify a wash trade. The first filter focused on NFT trades between the same wallet address. The second one was analyzing the NFT that has been traded back and forth between two different wallet addresses. The third filter was to determine if a wallet address had bought the same NFT multiple times. The last one was to identify whether the buyer and seller’s wallets were funded by the same wallet.
After the filters were applied to all-time NFT trading volume, the finding showed more than $30 billion NFT in trading volume could be attributed to wash trading. However, that number only represents 1.5 percent of all trades on Ethereum.
According to Hildobby, this activity affected some other marketplaces as well. For example, 98 percent and 87 percent of the trading volume on LooksRare and X2Y2, respectively, were from wash trading. Element and Sudoswap are known to have wash trading as well. Their volumes contributed 66 percent and 11 percent of the activity.
“Almost half of the amazing ‘total trade volume’ figures we often hear is just people gaming the system, and not legitimate trading,” Hildobby wrote.
Additionally, blockchain research company Chainalysis revealed in February that although most NFT wash traders did not receive profits previously due to high gas fees, about 110 wash traders had been able to make $8.4 million in profit.
Causes of wash tradings
Wash trading is illegal in the United States and difficult to track, but cryptocurrency and NFTs currently do not have strict regulations.
According to studies from Cryptoslate, one of the reasons for wash trading in the NFT market are tax evasion. While traders pay tax on their NFT assets, they can offset investment loss in the final tax calculation. However, it only applies under certain conditions, like when traders need to sell their assets.
Several startup companies have started working on resolving many issues in the NFT market and protecting it from malpractices and legal complications. One of these companies is the NFT-focused blockchain analytics startup bitsCrunch. Its mission is to help investors be more well-informed in making decisions by identifying the authenticity of assets and estimating their actual value.
Early in December, bitsCrunch co-founder and chief data scientist Saravanan Jaichandran talked to Inc42 about the challenges, growth drivers, roadblocks and future opportunities of NFT assets. He also mentioned a solution to prevent illegal activities.
“We have recently launched the Unleash NFT dashboard, which provides a comprehensive overview of NFT collections and holding in real-time,” Jaichandran said.
“On the B2B side, we have Liquify, which uses AI to estimate the value of the assets sold on NFT marketplaces. It considers factors like sales history, product metadata and more before determining the NFT asset’s true value.”
