Falling prices and the desire to lure traders to marketplaces saw NFT wash trading hit an all-time high in 2022. This is according to Dune Analytics researchers. They found out that over half of all NFT trading volume on Ethereum was engineered.
Wash trading has been a problem in the NFT market for a while. However, it wasn’t until recently that it became clear how big the problem has become. The tactic serves as a market manipulation tactic where the buyer and seller in a transaction are the same or collude together.
On December 16, a researcher going by the pseudonym Hildobby published an analysis that indicated over 58% of all NFT trading on Ethereum in 2022 was fake. January was the worst month, with the activity accounting for over 80% of the total NFT trading volume.
NFT Wash Trading Filter
To define what constitutes a wash trade, the researcher came up with four filters. The first focused on NFT trades between the same wallet address. The second focused on back-and-forth trades of the same NFT between two different wallet addresses. The third aimed to establish if a wallet address had bought the same NFT three or more times. And the final filter sought to establish if the buyer and the seller had wallets that were funded by the same wallet.
When the filter was applied to all-time NFT trading volume, the findings were astounding. Over $30 billion in NFT trading volume could be attributed to wash trading. However, as crazy as the number appears, it represents only 1.5% of all trades that have taken place on Ethereum.
The researcher adds that most of the trades are legit, even though they happen at lower prices compared to wash trades. This makes sense given that the overall goal of NFT wash trading is to inflate the prices of a given collection.
Taking a look at individual marketplaces, some were more affected than others in a bid to lure users. For example, 98% of LookRare’s trading volume came from wash trading, whereas 87% of X2Y2’s was derived from the same. Hildobby notes,
“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. Many widely quoted statistics have therefore been misleading at best, painting a picture of organic usage which hasn’t perfectly matched reality.”