Tuesday, Nov 28, 2023

2% Of Non-Fungible Token (NFT) Trades Globally Are Manipulated; How To Safely Tread The Market

Outlook Money

2% Of Non-Fungible Token (NFT) Trades Globally Are Manipulated; How To Safely Tread The Market

Although NFT wash trades (price manipulation) are done in various ways, the main intent is to manipulate the prices. Here’s how to safely navigate the NFT market

Top 10 NFT Marketplace Development Companies in USA 2022 – 2023
2% Of Non-Fungible Token Trades Globally Are Manipulated; How To Safely Tread The Market

About two per cent of all non-fungible token (NFT) trades globally are ‘wash-trades’, finds a report. Wash trade or price manipulation occurs when an individual buys his assets to artificially inflate or deflate the price.

The London-based blockchain analytics firm Elliptic in a report titled ‘NFT Report 2022’ highlights the menace and explains how price manipulation is done in the market.

The report observes that NFTs are susceptible to price manipulation as the market is heavily dependent on community engagement and influencers.

According to Ramkumar Subramaniam, CEO and co-founder of Guardianlink, an NFT marketplace, “Wash trading has painted a malicious picture for non-fungible tokens.” Many people fell “victim to manipulation and scams”, seriously damaging NFTs’ reputation.

According to Amit Jaju, senior MD, Ankura Consulting Group (India), a consultancy and advisory company, market manipulation can happen in many ways with an aim to artificially inflate or deflate the price of the NFTs. "One way that market manipulation and wash trading can happen in NFTs is when someone creates a large number of fake accounts and uses them to buy and sell tokens in order to create the appearance of high trading volume."

"This can artificially inflate a token's price, making it look like there is more interest in it than there really is," added Jaju.

NFT Wash Trading Trends 

The report highlights that a typical wash trading involves rapid transactions-- reselling an NFT at a higher or lower price--without considering the market risks. For instance, “address A may sell an NFT to address B, which rapidly resells it back to A. Similarly, A may sell an NFT to B, which sells it to “C”, and then it resells it back to A, closing the cycle,” said the report.

According to Vikram R Singh, founder and CEO, Antier, a blockchain consultancy company, "NFT marketplaces can use AI and smart contracts to recognize numerous self-transactions for an NFT in order to stop this from happening."

"As a result, malpractices such as money laundering through NFTs can be reduced. Thus, curbing malpractices through NFTs, wash trading, quick re-sale of NFTs and undeclared paid collaborations with celebrities," added Singh.

Celebrity Endorsements To Jack Up Prices 

Most NFT projects seek celebrity endorsements to boost demand and increase the prices, yet the celebrity may not have any involvement in the projects.

Citing an example, the report says that in September 2021, rapper Lil Uzi, who had nine million followers, advertised a Solana (SOL)-based NFT project called ‘Eternal Beings’. 

After his endorsement, all 11,111 NFTs were sold out. But the prices fell sharply below the minting cost after he deleted the tweet. 

Wash Trades For Publicity

The report observes that NFT wash trades are designed to keep the social media chats active and facilitate “underhand profits”. It is seen that social media conversations about a particular asset can influence its price as it can create hype around it.

Citing another example of wash trade, the report claims that a seller purchased his own NFT (Cyptopunk #9998) for $532 million, using a new crypto wallet after taking a flash loan. 

The wallet then transferred the NFT to the seller’s original wallet. The transaction set a record for the most expensive NFT to be ever sold.

According to Vineet Budki, managing partner and CEO, Cypher Capital, a Dubai based venture capitalist firm, "This growth in NFTs also attracted short-term opportunists who just wanted to take advantage and make a quick buck. People started finding ways to create artificial histories for NFT trades which gave some credibility to their NFTs - leading to rise in washtrading activities and price inflation. Across all marketplaces - including even OpenSea - washtrading volumes have grown substantially."

Reward Manipulation

Many NFT projects and marketplaces use incentives to attract users. The report claims that the rewards are offered when NFTs are staked, swapped, or traded on a specific platform.

“If these rewards are linked to trade volume, traders may deliberately overvalue their NFT sales to maximise reward claims,” the report notes.

"There will always be bad actors in rapidly growing industries like NFT but due to their open nature, but these problems are relatively easier to solve in the blockchain industry," added Budki.

Sweeping The Floor Price’ 

The report also highlights how some NFT developers manipulate the price “by sweeping the floor price” of a particular NFT. The tactic aims to jack up the floor price to trick bots, which then start purchasing other high-value NFTs in the same collection.

The study says that in March 2022, developer ‘Head Dao NFT’ used a burner wallet to buy 64 NFTs from his collection after advertising on Twitter that their floor price rose 60 per cent. The advert was to create an illusion that the NFTs were purchased by people and not him. However, after getting caught, the developer admitted to the manipulation.

According to Shrikant Bhalerao, co-founder , Seracle, a blockchain services company, "The growth NFTs have witnessed is far bigger than trend-based growth. An industry that picks up at this pace attracts foul players too, but it is on the shoulders of tech providers to work their ways out of the unique foul play. Copyright infringements, piracy, bogus images, money laundering and other counterfeits will be in constant battle with adapting technology."

According to Amanjot Malhotra, Country Head of Bitay, India, a crypto exchange: Crypto platforms must actively discourage wash-trading.

How To Safely Buy NFTs?

According to Amanjot Malhotra, Country Head of Bitay, India, a crypto exchange: Crypto platforms must actively discourage wash-trading. “Blockchain data and analysis platforms make it easy to spot users who sell NFTs to addresses they have self-financed, so marketplaces may want to consider bans or other penalties for the offenders.”

Amit Jaju of Ankura Consulting (India) advises to those people thinking of buying an NFT to do their research first. "Review the project thoroughly and make sure you understand how it works. Also, be sure to check out the team behind the project to see if they have a good track record. Lastly, don't invest more than you can afford to lose. NFTs are a risky investment, and there's no guarantee that you will make money back. So, only invest what you're comfortable losing."

Subramaniam adds that the most effective way to protect from wash trading is to check the addresses that fund the buyer and seller’s wallets. “If both of them are the same, it is quite evident that prices are being artificially manipulated.”