The NFT marketplace saw a big boom in 2021, with the sales of NFTs skyrocketing even further. The total NFT turnover for 2020 was estimated to be about $106 million, which further shot up to a stunning $44.2 billion. As per Chainalysis, a blockchain firm, many players in the NFT marketplace are “making a killing” with wash trading.
Wash trading is a trading activity in which the seller is on both sides of the transaction; yes, you heard it right, the buyer and the seller are the same people. Wash trading is an unethical practice done to inflate the asset value in the eyes of others. The primary reasons for wash trading, as stated by Chainalysis were:
1. To artificially inflate the value of NFTs.
2. Using wash trading in NFTs as a mode to launder money.
As per the report by Chainalysis, there were a total of 262 users who sold to self-financed addresses over 25 times. The figure consisted of 110 profitable trades and 152 unprofitable ones. There were 110 profitable trades with a whopping $8,875,315 in profits alone, and the unprofitable trades came down to $416,984. The profit after dwarfing losses comes down to $8,875,315.
Wash trading might seem to be an easy way to drive up NFT’s value, it is not a foolproof plan, stated Kimberly Grauer, director of research at Chainalysis. It is because of the gas fees charged for every Ethereum transaction. As per the report, there were 830 self-financed transactions. The seller made prolific attempts to generate profitable trades through wash trading. The total money spent on gas fees was $35,642, and the revenue from sales was a mere $27,258. It shows the desperate attempt to indulge in more self-financed trades, only to recover costs.
As per the Chainalysis blog, money laundering activities are small, but they’re still visible in the NFT market. Money launderers legalize their money through art. The transfer of paintings is easy as compared to others, art can be subjectively priced, and they use several loopholes in the taxation system meant for art collectors.
As per the report, cybercriminals use illicit funds to purchase and sell NFTs. In the third and fourth quarters of 2021, there was a significant rise in funds transferred from scam-associated accounts to NFT marketplaces. The total funds transferred only in the third and fourth quarter of 2021 was about two and a half million. Cryptocurrency-based money laundering witnessed in 2021 was about $8.6 billion.
NFT platforms let everyone sell NFTs by simply linking their wallet and paying the relevant fee without creating an account. Wash trading affects the whole ecosystem as the circulation of overvalued NFTs create an inequitable marketplace that becomes fatal for future growth because of weakened faith in the system.
It is believed that there might be a rise in such illicit activities. The Chainalysis blog post stated that they are equipped with software that can trace back self-financed transactions and that they have been tracing such addresses. There are still no laws against wash trading for NFTs like in some securities and derivatives.
It is the responsibility of NFT platforms to build up regulations in the best interest of their users.
Dapper Labs, an organization that provides NFT-based products and decentralized applications, is reported to be working with Chainalysis to keep wash trading and other unethical activities in check.
OpenSea, published a blog post on the 17th of Jan informing about the formation of an ‘NFT Security Group’ the members of which will share and educate about ‘vulnerable’ reports that will be fixed before being announced publicly so the users are not impacted by any problems. The members will work towards creating solutions to ensure better security revolving around Ethereum blockchain consensus, smart contracts, wallets, and metadata.
Alex Salnikov, co-founder and head of product at Rarible, explained to Cointelegraph that Rarible would be tackling this issue by stopping the RARI token distribution, an incentive program exclusively for Rarible users; a decision by the Rarible decentralized autonomous organization. Due to this, he said, “the issue is no longer relevant for our marketplace”. Rarible has taken up additional measures for the verification of its users.
Scams such as wash trading will rise irrespective of the controls and measures implemented by the platforms and decentralized authority. There might be a rise in such illicit activities before there is an industry solution, stated Grauer.
You as a user of these platforms might have to perform extra precautions to be safe from such scams and fraudulent activities.