Wash Trading accounted for over half of NFT volume in 2022: Report

Token incentives from LooksRare and X2Y2 boosted activity

January 2022 can be called the glory days of NFT trading.

Trading volume rose to roughly $20 billion a month, an all-time high and level that many participants in the space undoubtedly want to return to.

However, new findings at hildobbya pseudonymous researcher known for his prowess with chain analysis tells a different story about that time – about 80% of trades in January 2022 were wash trades.

“The laundry boom really made life tough for us data analysts, as it distorts basic statistics that we use to track marketplace usage,” hildobby wrote.

Wash trading occurs when people trade assets between their own accounts, usually to make interest in a given project seem higher than it really is. In this case, NFT traders did so to reap the rewards of token incentives that some marketplaces showered on their users in exchange for activity.

The main trading venues for wash are LooksRare, where transactions make up over 98% of the volume, and X2Y2, with 87%.

Incentivized trade

Both LooksRare and X2Y2 offered generous token incentives at launch in an attempt to gain market share. Naturally, NFT traders gamed the system by laundering NFTs like Meebits, which had no royalties at the time. The Defiant reported on the phenomena in January.

However, hildobby’s methodology allowed the analyst to quantify the total amount of wash trading in NFTs. The results aren’t pretty – of the $30B in NFT cumulative trading volume, 44.5% appear to be wash trades.

Artificially inflating volumes is nothing new – the Commodity Exchange Act made laundering illegal in the US in 1936. Despite the law, there have been violations – the Securities and Exchange Commission charged two people with laundering meme stocks as recently as 2021.

Hildobby’s report is not without its bright spots – wash trading accounted for just 2.3% of volume on OpenSea, the leading NFT marketplace.

Another silver lining from hildobby’s findings is that the NFT market is down, but not quite as much as previously thought. Using the analyst’s wash trade filter shows that the all-time high for organic weekly trades came in late August 2021, rather than in January 2022, which is widely accepted.

Compared to the organic weekly peak of $1.8 billion in August 2021, NFT trading volume is down 89.5% at the end of December. While still a big drop, it’s not quite the 95% carnage compared to the $5B-plus weeks in the NFT space in January.

Methodology

Hildobby filtered out laundry trades in four different ways. First, the analyst rejected all NFT purchases where the buyer and seller were the same wallet, an obvious sign that the trade is not organic.

Second, hildobby filtered out all trades going back and forth between two wallets, another sign of inorganic demand.

Third, the analyst took out wallets that bought the same NFT three times or more.

And finally, hildobby filtered out trades where both buyer and seller were financed by the same wallet.

Hildobby joined the venture company Dragonfly in Maylargely on the back of their work creating community dashboards on Dune Analytics, a chain-based data platform.