More Than $30 Billion of the NFT Trading Volume on Ethereum is Wash Trading.

Data from Dune Analytics suggests that shadow trades will account for more than half of the total NFT volume in 2022 and nearly 45% of all NFT volume in history.

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It is common knowledge that wash trading (a form of market manipulation where buyers and sellers are the same or collude together) continues to plague the NFT market. A recent report compiled on the blockchain data server Dune Analytics showed how big this problem is.

Based on an analysis compiled by an analyst under the alias Hildobby on December 16, wash trading accounted for more than half (58%) of the total NFT trading volume on the Ethereum network in 2022. This manipulation tactic was most prevalent in January when wash trading accounted for more than 80% of that month’s total NFT trading volume.

The analyst used four filters to filter out strange trading behavior that most likely indicated wash trading. First and foremost, he filtered out NFT trades between the same wallet addresses. Second, he focused on reverse trades with the same NFTs executed between two different wallet addresses (this is one of the most common wash trading tactics). Third, if a wallet address bought the same NFT three or more times, it was flagged as a wash trade due to the high unlikelihood of such a situation. Finally, if buyers and sellers in a transaction had wallets funded for the first time by the same wallet, it is evident that there is a connection between them and thus flagged as wash trading.

After applying all of the filters mentioned above to see how widespread this practice has become since the inception of the NFT markets, it was possible to associate more than $30 billion of NFT trading volume with wash trading over time. While this number is enormous, it represents only approximately 1.5% of all trades that have taken place on the Ethereum network. It may not sound very clear, but on the other hand, it appears that most of the transactions are legitimate. Traditional trades are generally conducted at a lower price than wash trades, as the goal is to artificially increase the cost of the NFT collection.

"Almost half of the amazing 'total trade volume' numbers we often hear are just people gaming the system, not legitimate trades," Hildobby wrote.

Based on this data, NFT marketplaces LooksRare and X2Y2, both of which offer various rewards for joining their platform, had the highest percentage of wash trading, at 98% and 87% of their total volume, respectively.

Hildobby thinks the increase in wash trading activity is due to competition among NFT marketplaces to gain market share in trading volume.

"Well-intentioned schemes to incentivize usage have quickly emerged as a way to position itself in the race to capture this volume and become the most successful marketplace," the author wrote. "Many of the widely cited statistics were therefore misleading at best and painted a picture of organic usage that did not match reality."

Wash trading is illegal under U.S. law, but unfortunately, it is still hard to track. In February, blockchain research company Chainalysis reported that most NFT traders using wash trading were previously unprofitable due to the high gas fees. A group of 110 traders still made a profit of $8.4 million through wash trading.

Source: www.coindesk.com