According to a Chainalysis analysis, most NFT wash traders are losing money

The NFT space is prone to wash trading, according to Chainalysis’ findings, yet most traders are not benefitting.

Nonfungible tokens (NFTs) have taken the globe by storm, resulting in a surge in mainstream interest and cryptocurrency acceptance. According to Chainalysis, a blockchain research organisation, the popularity of NFTs increased in 2021. Last year, according to Chainalysis’ “NFT Market Report,” at least $44.2 billion in cryptocurrencies was delivered to Ethereum smart contracts related with NFT marketplaces and collections. According to the research, this figure will be $106 million in 2020.

While impressive, the NFT space has been penetrated by an increasing number of scams and fraudulent activities. For example, OpenSea, a major NFT exchange, recently acknowledged that their free minting tool was vulnerable to abuse. As a result, 80 percent of NFTs developed using this tool were either plagiarised, false, or spam, according to OpenSea. If that wasn’t terrible enough, the NFT sector is subject to wash trading and money laundering, according to Chainalysis’ newest blog post detailing their “2022 Crypto Crime Report.”

In the NFT sector, wash trading is on the rise.

Wash trading, according to the blog post, is a transaction in which a seller is on both sides of the deal to create a false impression of an asset’s value and liquidity.

Wash trading has become a big worry in the NFT sector, which is unsurprising. Data from the LooksRare NFT marketplace recently revealed that the platform is prone to wash trading.

New ways to detect fraudulent conduct are being developed as wash trading becomes increasingly widespread on NFT platforms. Chainalysis’s chief of research, Kim Grauer, told Bitcoinsupports that the company has developed a potential tool for detecting people who are self-funding their own crypto wallets in order to undertake fraudulent transactions:

“We can see when a person buys a token with funds from the same individual who sold them that token using Chainalysis software.” This is how wash trading is defined.”

The firm can track NFT wash trade using blockchain analysis, according to the Chainalysis blog post, by evaluating sales of NFTs to addresses that were self-financed, meaning they were paid either by the selling address or by the address that initially funded the selling address.

While Chainalysis discovered that some NFT sellers have made hundreds of wash deals, Grauer pointed out that the majority of NFT wash traders are losing money. She stated, ”

“Overall, we discovered that washing trade NFTs is not profitable because you end up paying a lot in petrol fees.” Many wash merchants lost money because of the difference between the amount they spent on gas and the amount they made from their sales.”

More particular, Chainalysis discovered that 152 Ethereum addresses linked to wash traders resulted in $416,984 in losses. Grauer, on the other hand, noted that some wash dealers have had success. According to Chainalysis, wash trading profits totaled $8.9 million for 110 Ethereum addresses.

Successful wash traders, according to Grauer, are those that perform many NFT trades across multiple platforms. She did warn, however, that washing trade is not a smart idea in general because to the high prices of gas fees and the fact that all transactions are visible across the Ethereum blockchain network. “This is a dangerous form of crime to commit, made considerably worse by the fact that individuals have to pay high gas prices.” “Those who do this on a large scale need to be experienced,” Grauer said.


How can NFT platforms help users stay safe?

Although wash trading NFTs has proven to be dangerous and unproductive for most, Grauer believes that as the NFT space grows, this practise will become more frequent. “Anyone can perform wash trading if they can download an ETH wallet and buy an NFT,” she noted. With this in mind, it’s becoming increasingly vital for NFT platforms to enact policies to protect users from fraudulent activity.

According to Alex Salnikov, co-founder and head of product at NFT marketplace Rarible, there is a trend of consumers washing trading on platforms that offer incentive benefits for trading, according to what the platform has witnessed in the broader NFT ecosystem. According to Salnikov, the LooksRare platform aimed to reward users with the platform’s native coin, which may have increased the amount of wash trading on the site.

Following the discovery of this vulnerability, the Rarible decentralised autonomous organisation voted to halt the issuance of RARI tokens to Rarible users, according to Salnikov. As a result, “the issue is no longer relevant for our marketplace,” he said, adding that the platform has created a verification method that allows the Rarible staff to personally check a creator’s profile in order to further protect Rarible users. Salnikov went on to say:

“If this process is completed successfully, the user’s Rarible marketplace profile will be marked with a yellow checkmark. It’s worth noting that collectibles from unknown creators aren’t included in our search results or explore feed. Users will also be alerted if they are about to buy a collectible from an unknown author or collection.”

While Rarible has taken several efforts to safeguard customer safety across the platform, Grauer stated that Dapper Labs, a blockchain platform that delivers NFT-based goods and decentralised apps, is collaborating with Chainalysis to keep an eye on wash trading and other illegal behaviours.

Additionally, on Jan. 17, OpenSea released a blog post establishing its new “NFT Security Group.” Members will be asked to discuss and learn about vulnerability reports that have not yet been publicly disclosed in order to fix problems before users are impacted, according to the post. Members will also concentrate on developing solutions to ensure stronger security in the areas of blockchain consensus, smart contacts, wallets, and metadata, as well as knowledge of the consequences for interoperability.


Will rules ensure the safety of users?

In addition to these measures, conversations about non-financial transactions (NFTs) and compliance are progressing. While it’s difficult to tell whether NFTs should be regulated, Joseph Weinberg, co-founder of Shyft Network, a compliance-focused blockchain network, told Bitcoinsupports that he believes the space requires oversight:

“I believe that trading platforms that collect funds, such as OpenSea, will unavoidably be regulated as VASPs because they are in the business of connecting counterparties and accepting fees.” You can use things like multi-address hop detection and address screening to cluster and identify if there’s a chance that people are wash trading in terms of how NFTs should be controlled.”

NFTs, on the other hand, are still a grey area in terms of laws, according to Weinberg. “Regulators haven’t even been able to offer us clear direction on DeFi [decentralised finance], so I guess they’re waiting to see how it plays out,” he said, adding that the biggest issue for regulators right now is that art isn’t regulated:

“Historically, art markets have been exempt from KYC (Know Your Customer) and AML (Anti-Money Laundering) regulations. It’s also well known that the art world — and has for a long time — is a hotbed of money laundering. Because a token has a distinct set of use cases than a piece of paper, the question that needs to be posed is whether the ‘form’ is different from the ‘function.'”

As a result, Weinberg argues that before issuing recommendations, authorities should focus on how NFTs should be addressed. Meanwhile, some industry insiders anticipate the NFT community will take its own set of steps. Jack O’Holleran, the chief operating officer of Skale Labs, a platform that develops scaling solutions for Ethereum, told Bitcoinsupports that he believes free markets will win out in the end. “End users will avoid buying NFTs from sites that do not explicitly remove or identify overt wash trading numbers.” Traders and buyers of NFTs will migrate to exchanges and data aggregation sites that provide real-time market data.”


Even with solutions, NFT scams will continue to proliferate.

Unfortunately, Grauer expects that, despite compliance solutions, NFT platform activities, and potential restrictions, criminal behaviour in the NFT field will increase before declining.

Furthermore, while money laundering related with NFT addresses was found to be relatively low in 2021 by Chainalysis, Grauer raised concerns that the situation will only become worse. “My guess is that the sector will deteriorate in many ways before industry solutions improve it. Some NFT platforms may implement compliance in order to help things move forward.”


Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.

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