<p dir="ltr"><strong>NFT wash trading is a type of price manipulation</strong> that takes place for two reasons. The main motive is to collect trade incentives from rewarded sites like <a href="https://www.builder.news/crypto-insights/x2y2-vs-looksrare-7KJE5" alt="X2Y2 versus LooksRare: Incentivized NFT marketplace battle" title="X2Y2 versus LooksRare: Incentivized NFT marketplace battle" target="_blank" rel="" class="">LooksRare and X2Y2</a>. Because their token holders gain, these platforms are unconcerned with false volume. The second motive is to influence an NFT collection's historical pricing and volume. Deception of potential purchasers is unusual and usually ineffective, although it does occur.</p><p dir="ltr">"Floor sweeping" is another type of pricing manipulation. Because NFTs are illiquid by nature, purchasing floor NFTs in bulk dramatically raises the floor price. The idea is to instill fear among speculators and then sell the NFTs at a higher price. Other dealers sweep collections in order to capitalize on a predicted increase in value. This article will provide an overview of NFT wash trading, including its prevalence, detection techniques, and potential remedies.</p><h2>The current landscape of NFT wash trading</h2><h3>Ethereum NFT wash trading</h3><p dir="ltr">In 2021, organic transactions accounted for 98% of the total NFT volume. NFTs exploded, with collections like <a href="https://www.builder.news/crypto-insights/cryptopunks-nft" alt="CryptoPunks NFT - Will the glory that started in 2021 last forever?" title="CryptoPunks NFT - Will the glory that started in 2021 last forever?" target="_blank" rel="nofollow" class="">CryptoPunks</a>, Art Blocks, and Hashmasks spawning a new generation of digital art collectors in the Ethereum metaverse. Honest collecting and trading outnumbered market manipulators' efforts. Bad actors sought to unload artificially inflated NFTs onto gullible speculators, despite the fact that there was a minimal incentive to wash trade. The main goal prior to the emergence of incentivized marketplaces was to successfully deceive inexperienced participants, which was costly and unsuccessful.</p><p dir="ltr">Wash trading accounted for 72% of NFT trading activity on Ethereum in January 2022. The LooksRare vampire struck <a href="https://www.builder.news/crypto-insights/how-to-use-opensea" alt="An ultimate guide on how to use OpenSea NFT marketplace" title="An ultimate guide on how to use OpenSea NFT marketplace" target="_blank" rel="nofollow" class="">OpenSea</a> by airdropping LOOKS tokens to users while also beginning trading and staking incentives. LooksRare and its fork, X2Y2, represented the Web3 ethos that OpenSea lacked. They were decentralized, focused on the community, and, most critically, tokenized. However, when profits fall and market instability increases, the motivation to wash trade diminishes.</p><p dir="ltr">Blur is an upcoming <a href="https://www.builder.news/crypto-insights/top-nft-marketplaces-to-find-and-sell-your-assets-5jMoh" alt="Top NFT marketplaces to find and sell your assets" title="Top NFT marketplaces to find and sell your assets" target="_blank" rel="nofollow" class="">NFT marketplace</a> and aggregator for both amateur and expert traders. Wash trade increased from 55% to 76% following the launch of their incentivized mainnet on October 19th. Users will be qualified for retroactive BLUR token awards in January 2023 for listing actively traded NFT collections with their sophisticated tools. Although Blur has stated expressly that users that add collector royalties would earn more, royalties are still voluntary, and the site does not levy service costs. Blur tries to screen out wash trading by rewarding people who list actively traded collections. Its efficiency, however, is yet uncertain.</p><p dir="ltr">Despite the importance of wash trading in the chart above, it does not reflect transactions in which the seller got the NFT on a day other than the selling day. It is reasonable to infer that many wash traders return NFTs outside of the 24-hour timeframe. Another shortcoming of this system is that multi-account transfers are possible. NFTs that were transferred to many addresses before being remitted to the originating address are untraceable. The result is that wash trading is a significantly underreported figure that is more common than reported.</p><h3>Top-washed NFT collections</h3><p dir="ltr">Wash trading distorts demand, volume, and pricing. These variables can deceive newcomers to NFTs. It is concerning that substantially wash-traded NFTs exist when these users employ LooksRare and X2Y2. At $12 billion, Terraforms was the most wash-traded collection of all time. Wash trade accounted for 98.85% of the total volume. Meebits came in second, with $9.3 billion in total trading volume. Although wash trading accounts for 94.85% of Meebits volume, it is significantly smaller than the less popular Terraforms, Dotdotdots, and Dreadfulz. Meebits is a blue chip <a href="https://www.builder.news/crypto-insights/why-is-there-such-a-buzz-about-pfp-nfts" alt="Why is there such a buzz about PFP NFTs?" title="Why is there such a buzz about PFP NFTs?" target="_blank" rel="nofollow" class="">PFP NFTs</a> CryptoPunks airdrop that generates $0.5B in organic volume. Loot, a community-owned NFT gaming project founded by Vine co-founder Dom Hoffman, also draws considerable organic traffic.</p><p class="prosemirror-p-center"><img src="https://cdn.builder.news/news/11ed7085a71a9ab9a8e6023f659fee92.jpg" alt="Top washed NFT" title="Top washed NFT" width="600" height="180" class="lykafe0"></p><p class="prosemirror-p-center"><em>Source: Footprint analytics</em></p><p dir="ltr">Market manipulators are drawn to these NFTs for two reasons. For starters, the collections are well-known within the community. Second, the collections do not charge artists any royalties. Because there are no royalty costs, the cost-benefit ratio for wash trading to earn trade incentives is higher. NFT brand awareness may also result in mispriced assets selling at greater multiples and reducing the risk of selling assets after purchase.</p><h3>Blue chip NFTs</h3><p class="prosemirror-p-center"><img src="https://cdn.builder.news/news/11ed7085a71aa151a8e6023f659fee92.jpg" alt="Blue chip NFT wash trading" title="Blue chip NFT wash trading" width="600" height="238" class="lykafe1"></p><p class="prosemirror-p-center"><em>Source: Delphi Digital</em></p><p dir="ltr">Blue chip collections are known for their high prices, well-known brands, and widespread endorsements. Blue chip NFTs, like flexing real-world assets, create tremendous organic interest from traders and collectors. <strong>But how do blue chip NFTs perform when the same wash trading filter is used?</strong> Wash trading is unavoidable, although it is minor in comparison to organic trading activity, as indicated by the low wash trading volume %. Except for <a href="https://www.builder.news/crypto-insights/legendary-nft-collection-bored-ape-yacht-club" alt="Bored Ape Yacht Club - The legendary NFT collection of all time" title="Bored Ape Yacht Club - The legendary NFT collection of all time" target="_blank" rel="nofollow" class="">BAYC</a>, all of the blue chip collections had less than 0.5% of their volume susceptible to wash trading. BAYC had a little greater percentage, at 1.5%, but it is negligible in comparison to their $2.3 billion in organic volume. Blue chip collections charge artists <a href="https://www.builder.news/crypto-insights/nft-royalty" alt="NFT royalty: should it exist anymore?" title="NFT royalty: should it exist anymore?" target="_blank" rel="nofollow" class="">royalty fees</a> ranging from 5 to 10%. Trading benefits must overcome royalty, platform service, and gas prices in order for wash traders to prosper. Terraforms, the most washed NFT collection, generated six times the volume of the top six blue chip collections altogether.</p><p dir="ltr">LooksRare has stated that it will no longer charge royalty fees, following in the footsteps of competitors such as Blur and <a href="https://www.builder.news/crypto-insights/magic-eden-more-than-just-an-nft-marketplace" alt="Magic Eden - More than just an NFT marketplace" title="Magic Eden - More than just an NFT marketplace" target="_blank" rel="nofollow" class="">Magic Eden</a>. LooksRare continues to compensate creators, although with a significant pay drop. Creators will now get 0.5% of the initial 2% service fees for LOOKS stakers. <strong>How well will LooksRare screen out wash trading in order to reward collections for organic transactions?</strong></p><h2>The case study of Terraform</h2><h3>Wash trading filter comparison</h3><table><tbody><tr><td style="background-color: #f9cf2e;"><p class="prosemirror-p-center"><strong>Type</strong></p></td><td style="background-color: #f9cf2e;"><p class="prosemirror-p-center"><strong>Individual control NFT seller and buyer address</strong></p></td><td style="background-color: #f9cf2e;"><p class="prosemirror-p-center"><strong>Sales surpass Opensea’s max trading price</strong></p></td><td style="background-color: #f9cf2e;"><p class="prosemirror-p-center"><strong>NFT traded multiple times daily</strong></p></td></tr><tr><td style="background-color: [object Object];"><p class="prosemirror-p-center"><strong>Basic</strong></p></td><td style="background-color: [object Object];"><p class="prosemirror-p-center">yes</p></td><td style="background-color: [object Object];"><p class="prosemirror-p-center">no</p></td><td style="background-color: [object Object];"><p class="prosemirror-p-center">no</p></td></tr><tr><td style="background-color: [object Object];"><p class="prosemirror-p-center"><strong>Intermediate</strong></p></td><td style="background-color: [object Object];"><p class="prosemirror-p-center">yes</p></td><td style="background-color: [object Object];"><p class="prosemirror-p-center">yes</p></td><td style="background-color: [object Object];"><p class="prosemirror-p-center">no</p></td></tr><tr><td style="background-color: [object Object];"><p class="prosemirror-p-center"><strong>Strict</strong></p></td><td style="background-color: [object Object];"><p class="prosemirror-p-center">yes</p></td><td style="background-color: [object Object];"><p class="prosemirror-p-center">yes</p></td><td style="background-color: [object Object];"><p class="prosemirror-p-center">yes</p></td></tr></tbody></table><p dir="ltr">The table above shows typical wash trading filters used in analytics dashboards. These faulty filters will very certainly need to iterate in tandem with the evolving NFT standard and market scenario.</p><p dir="ltr">Filtering wash-traded NFTs based on previous price and volume also helps to avoid the spread of social media disinformation. A CryptoPunk sold for more than $500 million in late October 2021, generating news across several media sources. Crypto-native users quickly recognized the CryptoPunk as being sold with a flash loan - an uncollateralized loan acquired and reimbursed in the same transaction. The risk existed between the moment CryptoPunk #9998 made social media news and the transaction's illegitimacy was discovered. <a href="https://www.builder.news/earn/how-to-avoid-fomo-and-stay-loyal-to-a-trading-strategy-C4PbP" alt="How to avoid FOMO and stay loyal to a trading strategy" title="How to avoid FOMO and stay loyal to a trading strategy" target="_blank" rel="nofollow" class="">FOMO</a> may have prompted a newcomer to acquire a CryptoPunk between those times.</p><h3>Terraforms NFT sales</h3><p dir="ltr">According to surface-level research, Terraform NFTs are the most traded and demanded NFT collection on Ethereum. A newcomer may be cautious of digital assets selling for $1 million to $10 million or more, but the trap starts with the floor price. NFTs with rare characteristics often trade at higher values, including those in the $10k-$100k range. Terraforms sold in January varied from less than $1,000 to more than $10 million. As indicated by a top "Terraform NFTs" Google search result, it is reasonable to suppose that some inquisitive onlookers believe these trades are genuine.</p><p class="prosemirror-p-center"><img src="https://cdn.builder.news/news/11ed7085a71aa55ca8e6023f659fee92.jpg" alt="Top google search NFT wash trading" title="Top google search NFT wash trading" width="600" height="111" class="lykafe2"></p><p class="prosemirror-p-center"><em>Source: Business and finance</em></p><p dir="ltr">Concentrated wash trading happened throughout January-March of this year as a result of extremely inflating LOOKS trading incentives. Significant organic trading happened in collections introduced in December 2021 throughout the same months. During the same time period, market manipulators banded together to artificially boost Terraforms' price history. This was owing to the fact that sales history was the primary indicator utilized to drive value. Unlucky purchasers were left holding the bag, with no chance of recouping their investments.</p><h3>Basic filter</h3><p dir="ltr">Most Terraforms transactions are distinguished from wash trading by adding a simple filter. Most transactions above a few thousand USD were back-and-forth trades. This filtering approach has a weakness in that transaction outliers can be seen in the price range of 100k to 10M. Transactions across numerous accounts controlled and owned by the same person are not detected by this simple filter. Before being returned to the original seller, many NFTs were moved four to five times.</p><p class="prosemirror-p-center"><img src="https://cdn.builder.news/news/11ed7085a71aa9bba8e6023f659fee92.jpg" alt="Basic filter on NFT sale" title="Basic filter on NFT sale" width="600" height="235" class="lykafe3"></p><p class="prosemirror-p-center"><em>Source: Dune Analytics</em></p><h3>Strict filter</h3><p dir="ltr">Using a tight filter, the outliers noted in the previous figure are identified and removed. Removing high sales means removing sales that are higher than the top sales on OpenSea. Overtraded sales are NFTs that are traded more than three times each day. With these additional filters, the pricing history appears organic, since the peak NFT sales near $100,000 are realistic for people with rare traits. This strategy, however, is not without drawbacks. It is realistic to expect that NFTs will ultimately surpass their historical highs. Firstly, bullish catalysts like software updates, venture capital financing, and influencer endorsements can drive prices to rise. Secondly, many traders trade intraday. Frequent intraday trading generally entails snagging the lowest NFT and offering it at a little higher price. Market-making is common, particularly during volatile moments. This strict filter may limit organic transactions, but it is still a net positive in terms of delivering reliable statistics.</p><h3>Top traded Terraform NFTs</h3><p dir="ltr">Only five NFTs accounted for more than half of Terraforms' $12 billion in wash trading activity. The "back-and-forth" filter efficiently exposed these perpetrators. Terraforms #8997 created more than $1.5 billion in artificial volume, outperforming blue chip collections like <a href="https://www.builder.news/crypto-insights/azuki-nft" alt="Azuki NFT - The collection for anime lovers" title="Azuki NFT - The collection for anime lovers" target="_blank" rel="nofollow" class="">Azuki</a>, Clone X, and <a href="https://www.builder.news/crypto-insights/moonbirds-nft" alt="Moonbirds NFT: Owls don't sleep" title="Moonbirds NFT: Owls don't sleep" target="_blank" rel="nofollow" class="">Moonbirds</a>. Five of all these Terraforms NFTs were traded between two wallets up to 1,000 times. Terraforms #8997 was traded 500 times at an average price of $24M by the owner. Terraforms #5283 had the second-highest average trade ($3.7M/trade)</p><h2>NFT aggregators: A possible solution</h2><p dir="ltr">Using NFT aggregators is one technique to avoid market manipulation while improving UI and UX. To preserve their competitive advantage, <strong>industry leaders OpenSea and Uniswap Labs bought the aggregators Gem and Genie</strong>. Aggregators give both beginner and professional users access to narrower NFT spreads as well as the option to filter NFTs by traits and floor prices. Three months ago, aggregators accounted for 16% of total sales. Due to Blur's incentivized listing scheme, this has climbed to 34% today. Users are encouraged to list NFTs at competitive pricing, resulting in narrower spreads. Tighter spreads provide better pricing for traders and collectors. Prices that are optimal generate loyal customers and a positive flywheel.</p><h2>Conclusion</h2><p dir="ltr">Within the NFT industry, market manipulation is a persistent and increasing issue. The lack of appropriate detection methods has a detrimental influence on the user experience. However, this has not stopped adoption from increasing. During this bear market, the recent debut of Blur was a good development, as competition is a critical engine of innovation. Better tools are developed as a result of innovation to identify and avoid false pricing histories and listings. When it comes to retail crypto onboarding with NFTs, their safety and experience are critical.</p><div class="pr-block-special"><strong>Disclaimer:</strong><br>This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.</div>

NFT wash trading is a shady technique frequently used to manipulate markets and inflate demand.

The current state of NFT wash trading