Surging Cases of NFT Wash Trading Undermine Growth of the Nascent Industry

Insured Finance
5 min readFeb 11, 2022

The Intelligent Insurer #53: Chainalysis reports creators are selling themselves their NFTs to drive up prices

Non-fungible tokens (NFTs) have exploded in popularity in recent times, attracting mainstream interest, boosting the use of cryptocurrencies, and changing the way we view asset ownership. However, with the market hitting volumes of over $40 billion in transactions, fraudulent activities have infiltrated the rapidly growing industry.

In the latest Intelligent Insurer, we will analyze a shocking illicit tactic NFT traders are using to drive up prices and LooksRare’s alleged involvement in manipulating NFT prices. We will also consider the detrimental effect this activity has on the NFT space and how investors can protect themselves. Firstly, we will highlight some things we have achieved this week on the development front.

Insured Finance software development updates

We remain firm in our aim of pushing the development of our next-generation digital asset insurance platform to the next level in 2022. As part of our work towards the launch of our mainnet, we have made a few upgrades to the platform to boost user experience and set the ground for our mainnet release.

Over the past week, we have carried out an audit in preparation for our move to mainnet. With the help of the audit, we are making several adjustments to the platform. This past week, we integrated Hotjar for user behavior analytics to help us pinpoint major areas where we could improve user experience. In addition to that, we have also deployed a few minor bug fixes and feature improvements. Some of those fixes include:

  • The withdrawal button will now be disabled if the withdrawal amount is zero.
  • We are currently reworking the token bridge experience for users to enable seamless transactions.
  • We have fixed the broken link to claim monitoring documentation.

As our mainnet release approaches, we are also looking at improving the design and user flow of the platform. Insured Finance is fully committed to becoming a go-to platform for digital asset insurance in the crypto space with the mainnet launch. As always, our major concern is the safety of users, therefore, we will continue to explore various ways to improve our insurance products.

NFT wash traders made over $8.9 million in profit

With the meteoric rise of NFT creation and trading, blockchain analysis firm Chainalysis discovered a massive amount of wash trading being carried out on the NFT market. Wash trading is a form of market manipulation where a trader sells and buys the same asset to create artificial and misleading activity in the marketplace.

Wash trading is not a new concept within the cryptocurrency space, however, it is gradually becoming a major concern within the NFT space. An alarming number of fraudsters are profiting from this activity by driving up the prices of their NFTs.

In its report, Chainalysis revealed that it had discovered at least 262 traders who were conducting wash trades on various NFT marketplaces. Out of the 262 addresses, about 110 of them have profited immensely from the acting, carting away a whopping $8.9 million in profits. These addresses have traded the same NFT back and forth between their self-financed wallets at least 25 times, hiking the prices at each transaction. Unfortunately, they profited from selling the NFTs to unsuspecting investors who believed that the asset they were buying had been genuinely increasing in value.

However, the remaining 152 addresses associated with wash traders have not been so successful. Chainalysis discovered that they have incurred losses amounting to $416,984 from their activities. Most of these transactions are conducted across multiple blockchain networks, attracting extremely high gas fees that the perpetrators could not cover.

Although Chainalysis pointed out that the wash trading going on in the NFT space is “small”, analysts predict that the situation could escalate if proper measures are not established to curb it. In a curious twist, while tracking down addresses associated with wash trading, LooksRare was discovered to have facilitated this activity.

OpenSea rival LooksRare under intense scrutiny for facilitating wash trades

January 2022 saw the position of OpenSea as the largest NFT marketplace based on trading volume threatened by the launch of a new decentralized NFT trading platform LooksRare. The platform used aggressive tactics to divert OpenSea users to the new platform and boost its engagement. For the past few weeks, LooksRare has recorded monster trading figures, drawing the attention of analysts.

(Source: DappRadar)

According to data from the NFT analytics website, CryptoSlam, a shocking 94% of trades conducted with the top NFT on LooksRare, Meebits, were wash trades. CryptoSlam noted that LooksRare had encouraged these wash trading tactics through its rewards program.

The NFT marketplace rewards both buyers and sellers with a proportional amount of its native token, LOOKS, based on the percentage of overall sales they represent every day. With such a mouthwatering incentive, most users brazenly trade their NFTs back and forth between their different addresses to receive more rewards. LooksRare has given no indication of curbing this tactic and has not attempted to punish perpetrators.

The rise of wash trading cases has become a major concern for market watchers. Analysts are wary of the impact this tactic could have on both the NFT space and the entire crypto industry.

Rising wash trading reports undermine NFT industry credibility

NFT projects and platforms can no longer provide reliable statistics regarding their performance since wash trades create false volumes. Investors lose their trust in market volume stats and lose their money to low-value NFTs sold at exorbitant prices. Due to misleading statistics, NFT collectors become unable to make informed trading decisions.

The cryptocurrency industry would be the worst hit. Regulators and critics already have many arguments against the decentralized industry. Add NFT wash trading to the list, and they would get additional “ evidence” to maintain a stringent stance against the industry. For what it’s worth, wash trading has long been illegal in regulated financial markets. Thus, investors are protected in centralized markets but don’t receive the same benefit in decentralized ones.

As a nascent industry, the crypto space is met with several new developments, both good and bad. Despite having its perks, the industry comes with several risks. An increase in scams like wash sales is just some of the risks that investors need to watch out for. This is why digital asset insurance is becoming a huge part of the industry since it helps investors mitigate the effects of these unforeseen risks.

Insured Finance offers a suite of insurance packages that are guaranteed to protect your digital assets from risks associated with the digital space. Users receive full compensation in the event of unexpected incidents. While wash sales continue unabated in the NFT markets for now, it remains to be seen how long this practice will continue. Undoubtedly, we will witness changes and pushback to such schemes that endanger investor funds.

About Insured Finance

Insured Finance is a decentralized, peer-to-peer insurance marketplace. Users can request customized insurance on a wide variety of digital assets, thereby ensuring full protection. Those fulfilling requests can earn premiums and earn a competitive return on their capital. Claims are fully collateralized and settled instantly.

--

--

Insured Finance

A decentralized P2P insurance marketplace with easy claims and instant payouts. Powered by Polkadot.