NFTs have been prominent since their boom in recent years. Well, it might not be as outstanding as it was but its relevancy seems promising for the future. NFTs are versatile, noteworthy and of course unique. But as the NFTs became more popular, scams started to develop. There are instances where traders have falsified or influenced the price of an NFT by unworthy means. This is a scam in the NFT space known as “Wash Trade”. In this article, we will dive deeper into the question of what is an NFT Wash Trade and how serious of a problem is it.
What is an NFT Wash Trade?
An NFT wash trade is an occurrence, essentially a scam, where a buyer and seller sell an NFT back and forth. Only the first exchange is reported to the public. The buyer and seller might be two people collaborating or it can be the same person controlling two wallets. The result of this back and forth of the same asset results in the rising of the price of the NFT. The security and funds are simultaneously returned to their original owners in the second exchange.
One person can create several crypto wallets and exchange the same NFTs between the accounts, thereby increasing the value of the NFT and making its value skyrocket.
Now as all the transaction information is stored on the blockchain identifying the person is next to impossible as information is stored as alphanumeric characters. So pointing out the identity of two wallet addresses is not possible.
Wash trades are hard to identify but there is one incident in the NFT space that can be taken as an example of an NFT Wash Trade.
CryptoPunk 9998 was exchanged between two wallets on October 28, 2021, for 124,457 ether (ETH), which was then valued at about $532 million.
Etherscan claims that the buyer utilized a flash loan from a number of sources to pay 124,457 ETH to the CryptoPunk’s smart contract, which was then transferred to the seller’s wallet. After the loans were repaid, the seller delivered the 124,457 ETH back to the buyer, raising suspicions about the transaction. The NFT was relisted on the market for 250,000 ETH, or around $1 billion, after the conclusion of the wash trade. To put things in context, before the wash trading episode, this same CryptoPunk was selling for between $300,000 and $400,000.
There was also a tweet from CryptoPunk developer, Larva Labs which stated that a person bought the CryptoPunk from themselves with borrowed money and repaid the loan in the same transaction.
How serious of a problem is wash trading?
Wash trading in the NFT world is an alarming and distressing issue. Wash trades completely change the demand for NFTs by misleading means by the manipulation of the price of the NFT. With this, scammers or wash traders have a chance to earn a lot of profits.
According to Chainalysis, just 110 wash dealers made $8.9 million in profit in 2021. According to Bloomberg, as of April 2022, wash trading accounted for $18 billion, or 95% of the total trade volume on the NFT marketplace LooksRare.
But not all the wash trades result in profit. Sometimes owing to the amount of gas fees can exceed the amount that they have gained with the sale of the NFT. Chainalysis reported NFT wash trading on February 2022 by scrutinizing NFT sales to self-financed addresses. They identified 262 addresses that exceeded the selling of NFT to self-financed wallets 25 times. So the 262 wash traders that were looked upon only 110 resulted in a profit of $8.9 million in 2021.
Is wash trading a crime?
Wash Trade is illegal and is considered a scam in the NFT market. Although, NFTs are a recent development in the world and the NFTs are difficult to regulate since they are neither explicitly recognized by authorities as financial security nor a commodity. There are also not enough convincing instances by which wash trading can be regarded as a crime or illegal. So there is no particular law that protects the NFT market against wash trading.
How to identify an NFT wash trade?
If you’re willing to buy an NFT, then you should do some significant observations first.
First of all, you must check the price of the particular NFT you have your eyes on. If the price of the NFT is higher than the floor price of the entire collection, then there might be a chance that the NFT has been wash traded. Also, check if the NFT has rare traits and attributes as well. If it doesn’t then think twice and don’t purchase it.
Secondly, you must check the transaction history of the NFT. The NFT space has some handy tools such as Etherscan and BscScan with which you can check the transaction history of the NFT. Check the transaction history and if you see abrupt hikes in price from low values, it might suggest an NFT Wash Trade.
and BscScan with which you can check the transaction history of the NFT. Check the transaction history and if you see abrupt hikes in price from low values, it might suggest an NFT Wash Trade.
Also, check the wallet addresses. If the same wallet address comes up repeatedly in the transaction history, it suggests that the same wallet has bought the NFT many times. Also, check if a wallet address has worked with other wallet addresses in the transaction history. All these give signs of an NFT Wash Trade.
You must also communicate with the community of the project and know about their experiences in purchasing NFTs from the collection.
What to do if you are a victim of a Wash Trade?
Currently, there is not much you can do if you are a victim of a wash trade. There are not any laws that have been formulated to prove that NFT Wash Trade is a crime. There is little to no chance that you will be getting your money back. So, before buying an NFT you should check everything about the NFT. Perform the steps mentioned above and make yourself safe and sound.
NFT is an exciting space to go through and new beneficial changes are coming every day in it. Although, there are people who are creating ways of scam in it and taking the fun out of it. Wash Trading is a way of scamming in the NFT space to misguide the value of an NFT to other people. There might not be many solutions to tackle it now, but in the future, there will be legal actions taken against such scammers.