According to information obtained by Dune Analytics, illegal trades accounted for roughly 45% of all NFT volume globally and more than 50% of all NFT trade volumes in 2022.
It’s no secret that the non-fungible token (NFT) market is still plagued by wash trading, a type of market manipulation in which the buyer and seller in a transaction are the same or conspire. But a recent study conducted by blockchain data provider Dune Analytics has shown just how serious the issue has grown.
In 2022, wash trading will account for more than half (58%) of all NFT transaction volumes on Ethereum, according to research conducted under an assumed name by hildobby on December 16. The strategy reached its apex in January, when wash trading accounted for more than 80% of all NFT trading activity.
Four criteria were applied by the researcher to pick out unusual trading patterns that most likely indicated wash trading. They started by eliminating blatant NFT exchanges between wallet addresses. One of the most typical wash trading strategies was examined by looking at back-and-forth trades of the same NFT between two different wallet addresses. Third, due to the improbability of the circumstance, a wallet address was reported as a wash trade if it had purchased the same NFT three or more times. Finally, it was evident that there was a connection between a buyer and seller in an NFT transaction if their wallets were initially funded by the same wallet, which is why it was marked as a wash trade.
When all of the filters were used, it was possible to correlate wash trading to almost $30 billion in NFT trading volume over the course of history, demonstrating how pervasive the activity has become since the NFT markets have developed. Even though it only accounts for around 1.5% of all transactions on Ethereum, this figure is astonishing. The majority of trades are real, but they typically occur at a lower price than the wash trades, which makes sense given that the goal of many wash trades is to artificially boost the price of an NFT collection. If that seems complicated, don’t worry.
In contrast to real trading, “almost half of the incredible ‘total transaction volume’ figures we frequently hear are just people abusing the system,” hildobby noted.
The NFT marketplaces LooksRare and X2Y2 had the greatest percentages of wash trading, with 98% and 87% of their total volume, respectively. Both of these platforms offer token rewards for platform engagement.
Hildobby attributed the increase in wash trading activity to a more intense battle for market share in trade volume across NFT markets.
In the competition to draw this volume and establish themselves as the most prosperous marketplace, “well-intentioned strategies to stimulate usage swiftly arose,” the author stated. Therefore, a lot of often cited numbers have been, at best, deceptive, creating an inaccurate picture of organic consumption.
Wash trading is prohibited by U.S. law and is still challenging to monitor in the cryptocurrency world. According to Chainalysis, a blockchain research company, even if the majority of NFT wash traders were previously losing money because of high gas costs, 110 profitable wash traders were still able to make $8.4 million in profit.