when market manipulation affects NFTs

Markets with distorted transaction volumes, collections with inflated prices, the NFT market still has to deal with questionable practices.

In the traditional financial sector, market manipulation consists in carrying out operations, the consequences of which will distort the information intended for the players in the ecosystem. In a regulated sector, this type of practice is frowned upon.

The market is still developing and above all largely decentralized NFT it is not under the supervision of an authority, at least for now. Lack of regulation means an increased risk of manipulation.

This happens in different ways, either through markets themselves, either by the creators or even by the users.

NFT Markets, Victim or Responsible?

Dominated for several years by the OpenSea platform, born in 2017, the activity of the NFT market has been boosted by the emergence of many players, especially during the last two years with the arrival of Rarible (2020), Magic Eden (2021), Looks Rare and X2Y2 (2022).

Therefore, in this competitive sector, some go through questionable processes to stand out, especially the use of commercial washingthat is, artificially creating transactions to inflate the volume of exchange and thus activity.

X2Y2.io website capture. © JDN

“We first had the case with Rarible, it was the first example”, Gauthier Zuppinger confesses, co-founder of analytics site NonFungible.com and author of a talk titled “The Truth About Market Manipulation” at NFT. London. “Then we saw LooksRare, X2Y2 lend itself to this. The latter is one of the biggest examples with over $500 million per month in wash trades. In 2022, we saw that 12% of trades in the market corresponds to wash trading. is important enough to cloud the reading of a market.”

It is important to clarify that NFT market wash trading is an open secret, the presentations of another data collection site Dune.xyz it also corroborates the words of NonFungible’s boss and even presents market balances excluding suspicious transactions.

Among the main stakeholders, the development manager of X2Y2 does not deny the presence of washtrading, but disputes the platform’s responsibility. “It’s not something we support,” Derek Caussin replies. We ourselves, when we compile our monthly statistics within the country, publish the figures without trading washing. Simply put, our protocol is designed to reward the most active and traders abuse it.”

This is really another explanatory factor for wash trading: some platforms like Rarible, LooksRare and X2Y2 have created their own token, which is most often used as a reward to drive transactions on the platforms. In fact, several users generate tokens by transacting around the same assets.

“Wage to Trade Encourages Wash Trading”

“This is the most common case,” said Gauthier Zuppinger. “It pays very, very well, this reward mechanic, it pays commercialencourages wash trading.”

According to the analyst, one of the most obvious patterns is that of repeated transactions between two wallets, usually owned by a single holder. However, current models would be increasingly complex with dozens of portfolios and assets involved, making the task of observers particularly difficult, if not impossible, for a neophyte.

“You need to look at the sales history. If you notice a lot of repetitive activity, an always similar transaction value or wallet addresses that appear too often, there is probably something strange. However, this is increasingly complicated for an untrained user. to arrive at a market and try, on your own, to understand what’s going on. It takes a lot of time and you have to handle a huge amount of data,” slips Gauthier Zuppinger, whose team does not rely on APIs. of markets, potentially distorted, but in the direct analysis of the activity of blockchains.

NFT creators sometimes work responsibly

NFTs now number in the millions, on a growing number of networks such as Ethereum, Polygon, Flow, Tezos, Immutable X, Wax, etc. A jungle in which creators must also stand out. In fact, some adopt a strategy similar to that of the markets, artificially inflating the price of their collection. All you have to do is create larger and larger transactions around the same asset, or a whole collection. “In summary, a user will trade himself an NFT at the price of a few ethers (one ether is worth about 1160 euros as of November 16, 2022, editor’s note) to inflate the price and give it visibility”.

And thus benefit from the liquidity of an inexperienced collector.

In 2020NonFungible.com was already discussing clear cases, from Cryptokitties to some Decentraland metaverse assets.

Even if zero risk doesn’t exist, there are signs to best protect yourself from falling into the trap of artificially incentivized value NFTs:

  • In this mature sector, NFT creators are less and less anonymous. Regardless, an unidentified creator poses an additional risk.
  • As far as possible, it should be verified that the smart contract at the origin of the NFT has been audited. Although not foolproof, verification badges exist in some markets and explorers like etherscan (for the Ethereum network) have also implemented it for certain types of assets.
  • In the case of collections, it is important to check how widely the collection is distributed. The OpenSea platform now shows the number of unique holders within the same collection. Too much concentration in the hands of a single collector is generally a bad sign.

In the end, common sense must prevail. Even if the method is still not perfect, online verification of the history of an artist or a team is important and it should always be kept in mind that the NFTs that can achieve a high rating are not the most frequent: according to the firm. Nansenof the 29,000 collections placed on Ethereum between 1er January and June 30, 2022, two-thirds collected less than 5 ethers.

Leave a Comment