May 27th, 2022
Wash trading is a transaction in which the buyer and the seller of an asset are the same person. Wash trading is especially easy to perform on the blockchain because the anonymity of blockchain accounts makes it difficult to prove a link between them.
Wash trading has become common on NFT marketplaces. It can be used to both inflate the perceived value of NFTs and to earn money for the traders.
As their name states, NFTs or “non-fungible tokens” are non-fungible assets. This means that each token has its own intrinsic value that can differ from other NFTs from the same collection.
Like other non-fungible assets, such as art, this intrinsic value can be difficult to determine. For example, two pieces of art by the same artist may fetch wildly different prices, as might two similar pieces of art by different artists. The value of an asset is how much people are willing to pay for it.
Wash traders can take advantage of this fact to artificially inflate the perceived value of NFTs. By performing fake sales of an NFT at inflated prices between wallets that they control, they can create a historical record of the NFT being traded at a particular value.
Based on this record, they can then offer the NFT for sale at an inflated price. Without any other means of valuing the asset, a potential seller would pay way more than the NFT was “worth”.
NFT adoption has grown rapidly as more traders enter the market. Some NFT platforms are actively working to increase NFT trading in general and their own market shares. One of the common ways of accomplishing this is to offer rewards for trading NFTs. Any time that an account buys, sells, or trades an NFT, that account would receive some of the platform’s native reward tokens.
Some wash traders have taken advantage of these reward systems to make a profit at the platform’s expense. By making trades of NFTs between wallets that they control, a user can earn reward tokens without giving up their NFTs. According to Chainalysis, one pair of wash trading wallets has built up more than 650,000 wETH in this way.
NFT traders can have many legitimate reasons to move assets between different wallets under their control. However, wash traders typically do so for malicious purposes and abuse the platforms where NFTs are bought and sold.
While blockchain accounts are theoretically anonymous, in reality it is possible to determine if multiple wallets belong to the same party. Before trusting pricing information for an NFT, check that trades of the NFT are legitimate and not wash trades.