About two percent of all trades in non-fungible tokens (NFTs) globally are “wash trades”, a report finds. Wash trading or price manipulation occurs when a person buys their assets to artificially inflate or deflate their price.
In a report titled ‘NFT Report 2022’, London-based blockchain analytics firm Elliptic highlights the threat and explains how price manipulation is done in the market.
The report observes that NFTs are prone to price manipulation as the market relies heavily on community engagement and influencers.
According to Ramkumar Subramaniam, CEO and co-founder of Guardianlink, an NFT marketplace, “Wash trading has painted a malicious picture for non-fungible tokens.” Many people became “victims of manipulation and fraud”, seriously damaging the NFT’s reputation.
According to Amit Jaju, senior MD, Ankura Consulting Group (India), a consulting and advisory firm, market manipulation can take place in many ways with an aim to artificially inflate or deflate the price of the NFTs. “One way that market manipulation and wash trading can happen in NFTs is when someone creates a large number of fake accounts and uses them to buy and sell tokens to create the appearance of high trading volume.”
“This can artificially increase the price of a token, making it appear that there is more interest in it than there really is,” Jaju added.
NFT Wash Trading Trends
The report highlights that a typical wash trade involves quick transactions – the resale of an NFT at a higher or lower price – without considering the market risk. For example, “address A can sell an NFT to address B, who quickly resells it back to A. Similarly, A can sell an NFT to B, who sells it to “C”, and then it resells it back to A, and ends the cycle,” the report says.
According to Vikram R Singh, founder and CEO, Antier, a blockchain consultancy, “NFT marketplaces can use AI and smart contracts to recognize a series of self-transactions for an NFT to prevent this from happening.”
“As a result, malpractices such as money laundering through NFTs can be reduced. Thus, malpractices through NFTs, laundering, quick reselling of NFTs and black paid collaborations with celebrities can be reduced,” Singh added.
Endorsement of celebrities to increase prices
Most NFT projects seek celebrity endorsements to increase demand and increase prices, but the celebrity may not be involved in the projects.
Citing an example, the report says that in September 2021, rapper Lil Uzi, who had nine million followers, announced a Solana (SOL)-based NFT project called “Eternal Beings”.
After his approval, all 11,111 NFTs were sold out. But prices fell sharply below mintage cost after he deleted the tweet.
Vask trades for publicity
The report observes that NFT wash trades are designed to keep social media chats active and facilitate “underhand profit”. It has been seen that social media conversations about a particular asset can influence its price as it can create hype around it.
Citing another example of wash trading, the report claims that a seller bought his own NFT (Cyptopunk #9998) for $532 million using a new crypto wallet after taking out a flash loan.
The wallet then transferred the NFT to the seller’s original wallet. The transaction set a record for the most expensive NFT ever sold.
According to Vineet Budki, managing partner and CEO, Cypher Capital, a Dubai-based venture capitalist firm, “This growth in NFTs also attracted short-term opportunists who just wanted to take advantage and make money. People started finding ways to create artificial stories of NFT traders giving some credibility to their NFTs – leading to an increase in wash trading activity and price appreciation. Across all marketplaces – including even OpenSea – wash volume has grown significantly.”
Reward manipulation
Many NFT projects and marketplaces use incentives to attract users. The report claims that the rewards are offered when NFTs are bet, traded or traded on a particular platform.
“If these rewards are tied to trading volume, traders may deliberately overestimate their NFT sales to maximize reward claims,” the report notes.
“There will always be bad actors in fast-growing industries like NFTs due to their open nature, but these problems are relatively easier to solve in the blockchain industry,” Budki added.
‘Sweep the floor price’
The report also highlights how some NFT developers manipulate the price “by swiping the floor price” of a particular NFT. The tactic aims to jack up the floor price to fool bots, who then start buying other high-value NFTs in the same pool.
The study says that in March 2022, developer ‘Head Dao NFT’ used a burner wallet to buy 64 NFTs from his collection after announcing on Twitter that their floor price rose by 60 percent. The advertisement was intended to create the illusion that the NFTs were bought by people and not him. However, after being caught, the developer admitted to the manipulation.
According to Shrikant Bhalerao, co-founder, Seracle, a blockchain services company, “The growth NFTs have witnessed is far greater than trend-based growth. An industry picking up at this pace is also attracting unsavory players, but it is on the shoulders of technology vendors to work their way out of the uniquely ugly game. Copyright infringement, piracy, fake images, money laundering and other counterfeits will be in constant battle with custom technology.”
How to buy NFTs safely?
According to Amanjot Malhotra, country manager of Bitay, India, a crypto exchange: Crypto platforms must actively discourage laundering. “Blockchain data and analytics platforms make it easy to detect users selling NFTs to addresses they have self-funded, so marketplaces may want to consider bans or other penalties for the offenders.”
Amit Jaju of Ankura Consulting (India) advises those thinking of buying an NFT to do their research first. “Review the project thoroughly and make sure you understand how it works. Also, be sure to check out the team behind the project to see if they have a good track record. Finally, don’t invest more than you can afford to lose. NFTs is a risky investment and there is no guarantee that you will make money back. So only invest what you are comfortable losing.”
Subramaniam adds that the most effective way to protect against wash trading is to check the addresses that fund buyers’ and sellers’ wallets. “If both are equal, it’s pretty clear that prices are being artificially manipulated.”
