Over $30B of NFT Trading Volume on Ethereum Is Wash Trading, Research Suggests

It’s no secret that wash trading – a form of market manipulation where the buyer and seller in a transaction are the same or collude together – continues to plague the non-fungible token (NFT) market. But a recent report compiled on blockchain data site Dune Analytics has revealed just how bad the problem has become.

According to the analysis compiled by pseudonymous researcher hildobby on Dec. 16, wash trading accounted for over half (58%) of the total NFT trade volumes on Ethereum in 2022. The tactic peaked in January, with wash trading accounting for over 80% of the total NFT trading volume that month.

The researcher used four filters to weed out odd trading behavior that most likely pointed to wash trading. First, they filtered out obvious trades of NFTs between the same wallet address. Second, they looked at back-and-forth trades of the same NFT between two different wallet addresses – one of the most common wash trading tactics. Third, if a wallet address had purchased the same NFT three or more times, it was flagged as a wash trade because of the unlikeliness of the situation. Finally, if a buyer and seller in an NFT transaction had wallets that were first funded by the same wallet, it was obvious that there was a connection between them and was therefore flagged as a wash trade.

To understand how prevalent the practice has become since the NFT markets emerged, when all of the filters were applied over $30 billion of NFT trading volume from all time could be linked to wash trading. This number is staggering, though it only represents about 1.5% of all trades that have taken place on Ethereum. If that seems confusing, don’t worry: What it shows is that the majority of trades are legitimate, but happen at a generally lower price than the wash trades, which makes sense when the point of many wash trades is to artificially inflate the price of an NFT collection.

“Almost half of the amazing ‘total trade volume’ figures we often hear is just people gaming the system, and not legitimate trading,” hildobby wrote.

According to the data, NFT marketplaces LooksRare and X2Y2 – which both offer forms of token rewards for engagement on the platform – had the highest percentages of wash trading, 98% and 87% of their total volume, respectively.

Hildobby attributed the rise in wash trading activity to increased competition among NFT marketplaces to capture trade volume market share.

“Well-intentioned schemes to incentivize usage quickly emerged as a way to pull ahead in the race to attract this volume and become the most successful marketplace,” the author wrote. “Many widely quoted statistics have therefore been misleading at best, painting a picture of organic usage which hasn’t perfectly matched reality.”

Wash trading is illegal under U.S. law and remains difficult to track in the crypto space. In February, blockchain research firm Chainalysis reported that while most NFT wash traders were previously not profitable due to high gas fees, a group of 110 profitable wash traders were still able to make $8.4 million in profit.