Beware of NFT wash trading

the Non-fungible token

To put it simply and in summary, an NFT is not interchangeable, and like all works of art, they are not equal. Each NFT is different because unique, each having a digital certificate registered on a blockchain. In addition, by relying on blockchain technology, they take advantage of its unique characteristics, namely traceability and its tamper-proof aspect.. In other words, anyone online can share a picture of a famous painting, it doesn’t mean they own it. The signature helps to show that you are the sole owner, and again thanks to the blockchain, everyone can see that the NFT belongs to you. For example: a replica of the famous Mona Lisa painting is not very valuable. What makes the painting valuable is indeed the consensus around Leonardo Da Vinci’s signature.

Unfortunately, despite the aforementioned characteristics, and like many other assets, market manipulation is no exception in the NFT space. In other words, many people try to manipulate the price of these digital assets through what is called “wash trading”.

wash trade

Wash Trading is a term used in finance, which refers to the process of buying and selling assets to create a misleading market signal.

Shadow trading is a process where a trader buys and sells a security for the express purpose of providing misleading information to the market. In some situations, wash trades are executed by a trader and broker who collude, and other times wash trades are executed by investors acting as both buyer and seller of the security.” Investopedia.

In the crypto ecosystem, this is done by trading assets in an attempt to create an illusion of liquidity and manipulate market value. Recently, Bloomberg and other publications have documented NFT “washing” operations that require the immediate attention of the entire community.

Wash Trading with NFT sauce

What we mainly observe when we talk about “wash trading” in this ecosystem is the process by which many transactions are carried out in appearance for stratospheric amounts but which are in fact purely fictitious. Concretely, back-and-forth operations appear between two addresses belonging to the same wallet. A sum X is transferred to address A of wallet Y to address B of wallet Y.

Transfers of WETH between the same wallets

In wash trading, scammers participate in the following trends to manipulate the industry:

  • Buying an NFT to stimulate artificial demand for a project.
  • Artificially inflate transactions by buying and selling assets.
  • Collect rewards using assets that are more valuable than transaction fees.

These practices have created a dangerous and unfair environment for investors and collectors. It is a form of fictitious trading, ie manipulating the market by making it look like there is more activity than there would be organically. Sham trading can be used to stimulate demand for a financial asset or to hide money from illicit activities, for example.

The case of CryptoPunk 9998

The NFT in question sold for a crazy $532 million (124,457 ETH at the time, October 2021).

CryptoPunk 9998

Yes you are not dreaming. Over $500 million for this pixelated digital monstrosity. But digging into NFT transactions reveals anomalies. The CryptoPunk was transferred between two addresses X and Y of the Ethereum blockchain for payment of 124.457 ETH. Back to the facts

Wallet Y holds CryptoPunk 9998 and is listing it for sale for 124.457 ETH. Wallet X borrows from a specialized protocol for the sum of 124.457 ETH. Wallet X transfers this amount to seller Y through a smart contract (smart contract). Y sends the NFT to X in exchange for the 124.457 ETH. Until then everything is going well but the quack happens.

Y returns (oddly) to X the 124.457 ETH which allows him to settle the loan initially made. Finally, according to Bloombergthe NFT returned (as if by magic) to the starting Y address. In other words, transactions have taken place between two different wallets but belonging to the same person. These transactions have the effect of increasing the volume of transactions on an asset, which can make it more attractive fictitiously, because increasing the volumes of transactions. A manipulation that results in attracting investors to a falsely traded asset. The CryptoPunk was finally put up for sale by the famous seller/buyer X/Y (the same person) for the sum of 250,000 ETH hoping that a lamba individual wishes to acquire it after seeing that several transactions have taken place on the asset in question.

Let’s generalize NFT wash trading

When someone manipulates the number of transactions in a digital asset, they get the opportunity to sell their assets at a heavily overvalued price. For example, if someone sees an NFT selling for $50,000 1h earlier with a lot of back and forth between different addresses and the same NFT is listed for sale for $10,000 at time T, he will likely think they are buying the digital asset for a huge bargain. Hoping to be able to resell it a little more quickly, since it was sold 1 hour earlier 5x its current price.

Meanwhile, in the end, someone just sold the NFT to themselves for $50,000 with totally artificial trading volumes, for an asset that probably has no value. In such cases, an individual would spend a huge amount of money on something that was considered worthless before the “washing”.

To avoid being “washed out” vigorously, it is necessary to authenticate the addresses on the blockchain in order to identify whether the asset in question is transmitted at different prices but to similar addresses. A relatively long process that will probably discourage a large number of investors from checking whether the asset they adore will wring them out or not. I am concocting a guide for authenticating NFT transactions on the Ethereum blockchain. To be found very quickly in the columns of Zonebourse.

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