NFT Trading Volume on Ethereum Is Mostly Wash Trading

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An extensive amount of NFT trading volume on Ethereum appears to be a mirage, according to the latest analytics from the data platform Dune. The report was submitted by the user hildobby in December 2022. Read on to learn why, and what we can do to resolve it.

Things are not always what they seem regarding crypto data, and a deeper truth lies behind the impressive, flashy metrics. The purpose of this shady practice is to manipulate markets and create a false perception of high demand.

In this article, we aim to examine how “wash trading” distorts critical metrics in NFT markets. We will also discover how wash trading affects key marketplaces, and the surprisingly large percentage of total NFT trade volume it represents.

What is NFT Wash Trading?

A wash trade occurs when an investor sells and buys the same financial instruments concurrently to create deceptive, fictitious activity in the market.

With NFTs, wash trading occurs when the same individual is behind both sides of the transaction. In other words, both the buyer and seller addresses are owned by the same individual. Currently, wash trading is widespread in NFT markets, as they are neither regulated nor supervised by the government.

Over the years, numerous instances of wash trading have been reported on CEXs. A report that Bitwise presented to the US Securities and Exchange Commission (SEC) in March 2019 revealed that out of the 6 billion USD in $BTC spot trading volume reported on CoinMarketCap, 95% was fake.

It may seem old news, but an article published by Kaiko in July 2022 says otherwise. The article explains that Binance's volume exploded on a few trading pairs after trading fees were removed, which indicates wash trading.

The analytics shared on Dune shows that wash trading peaked in January 2022, with more than 80% volume.

How Does Ethereum NFT Wash Trading Work?

Type 1: The Objective Is to Accumulate Platform Rewards

Most commonly, NFTs are traded between two wallets controlled by the same person for the highest amount of ETH. The objective is to acquire token rewards with a value greater than the gas fees paid. In some NFT marketplaces, such as Rari, active users receive rewards based on their trading volume in the form of the platform's token. By creating huge trading volumes, wash traders maximize their rewards. As a result, users who attempt to analyze NFT collections or marketplaces based on liquidity and volume can easily be misled.

Type 2: The Objective Is to Create a Sense of Value or Liquidity

Another objective in wash trading is to create the illusion of liquidity or value. Some dishonest creators use wash trading to mislead buyers by creating a false sense of liquidity and an exaggerated value for a specific NFT collection or asset.

Their profit comes from tricking genuine buyers into buying NFTs at inflated prices. Wash traders use new wallet addresses that are self-funded from central exchange wallets to conceal their activities.

Type 2 wash trading produces a relatively small volume, which does not disrupt the market as much as Type 1.

Detecting Wash Trading

Several analytics platforms, including Dune and Footprints Analytics, have similar approaches.

In Figure 1, Dune Analytics implemented its detection filters on the collections with the highest trading volume on different marketplaces.

Based on their filters, they have determined that on Ethereum, only 1.5% of trades are wash trades; however, 44.07% of the trading volume of these collections are wash trading transactions. It is important to note that wash trade ratios vary significantly from platform to platform.

In some cases, such as OpenSea, CryptoPunks & Foundation, the contribution of wash trades is insignificant.

In contrast, in others, such as LooksRare and X2Y2, wash trades generate large volumes and transaction counts.

The vast majority of the astounding "total trade volume" numbers result from people manipulating the system rather than legitimate trading.

There is a relatively new dynamic at play here.

In late 2018, wash trades accounted for over 25% of total transactions, a far higher percentage than in the past. However, they did not exceed 10% of all transactions in 2022, generally remaining at around 1%:

In terms of volume, though, the picture changes entirely.

There had been a few notable spikes in wash trading before 2022, but they only accounted for 10% of the volume.

However, as the new year rolled in, wash trades skyrocketed as a % of total volume. While they peaked in mid-January (2022) at over 80%, they have consistently comprised a significant portion of total trades throughout the year.

Wash Trading: How To Spot It?

Below is a checklist of suspicious data and activity that should raise the alarm bells of any prospective NFT buyer:

- The same NFT is traded by the same address more than X times per day, while the rest of the collection remains untraded

- The same address trades the same NFT at high frequencies - In the absence of marketing or promotion, a collection of NFTs goes into a high-frequency self-selling - There is a significant difference between the average historical price transacted on marketplace A vs. B.

- The sales price of an NFT is transacted at an amount X times greater than the lowest-priced NFT

- All suspicious wallets that buy and sell NFTs are funded through the same wallet

- The trading volume is continuously abnormally high


The rapid growth and maturation in the NFT space provoked platforms to become increasingly competitive in 2022, and it became clear that capturing trade volume market share was a top priority.

Marketplaces quickly developed effective schemes to attract this volume and gain the upper hand in the race. As a result of this effort, wash trading emerged as a legal gray area, distorting key performance metrics used by analysts.

Wash trading has led to many widely cited statistics that are, at best, misleading, painting a picture of organic usage which does not accurately reflect reality.

Even though all marketplaces experience some level of wash trading, LooksRare, X2Y2, Element, and Sudoswap are by far the worst affected.

The commonality of these marketplaces is that they all have a token used as a trading reward, which paves the way for those high inorganic numbers.

Although implementing strict regulations may reduce wash trading, there are still no restrictions, except for the speculation that laws are currently being drafted.

These regulations may only apply in some jurisdictions, and we know that many bad actors either ignore or find a way to circumvent the rules. Thus, wash trading is here to stay, regardless of the future of this industry, illustrating the importance of filtering it out in order to allow for reliable NFT data analysis.


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