Let’s All Wash Our Hands, Not Our Tokens
The first game from RedFOX Labs’ gaming studio — KOGS — runs on non-fungible tokens. These playable, collectible, sellable, and tradeable game pieces are all one-of-a-kind creations.
Due to the scarcity of NFTs in general, some pieces fetch prices crossing the U.S. $1k mark and much higher. Per the team at NonFungible.Com — who compiled a report analyzing over 20M transactions — May 2020 saw over $2.5M flow through the NFT space, with average prices higher than $33:
But unfortunately, fraudsters come out of the woodwork whenever a financial ecosystem begins to gain traction. And within the NFT industry, as well as on centralized cryptocurrency exchanges, wash trading is a popular tactic among the unscrupulous.
Today, we’re going to give you fair warning about the people and bots keeping NFTs a little too clean. Because once you know how to identify frauds and scams, they’re all the easier to avoid.
Whether you’re looking at coin prices on CoinGecko or checking NFT trade history on NonFungible, ‘volume’ is a shared metric. The more trade volume an asset or exchange has, the higher its perceived liquidity.
But wash trading artificially inflates trade volumes and imposes adverse effects on markets. Both assets and exchanges are not what they seem when wash trading is involved.
Wash trades occur when investors place a sell order, then place a buy order to fulfill their own sell order.
We suspect that many of today’s centralized exchanges deploy bots to pump fake volume 24/7. But thanks to sly sleuthing by the NonFungible team, we have proof of a Blockchain Cuties asset going to the cleaners:
The above image shows the same digital cat — BC #70086 — trading six times in less than 24 hours. Unlike bitcoin and other fungible cryptocurrencies, this NFT is decidedly unique. Its label even denotes a five-digit number. In other words, there’s no other cat like this one.
Solo Table Tennis
Notice the thumbnails inside the above image’s red box? Each represents an address on the Ethereum network. Most likely, the same individual controls the private keys for both.
Although the transactions occur in several-hour intervals, the attempt to evade attention wasn’t enough — using only two addresses is a dead giveaway. BC #70086’s trade history is a clear-cut case of someone purchasing and repurchasing the same asset.
As if playing a one-person game of table tennis — with one half of the table up against the wall — someone was bouncing this NFT back and forth to themself.
Always Play Defense
Like fungible cryptocurrencies before them, NFTs will eventually face regulation. And, at least for now, we can only hope that future trading standards and regulatory framework help keep NFTs in their original, unwashed states.
At $2.5M monthly volume, the NFT industry lags far behind the crypto space as a whole. But that figure is certainly large enough to attract bad actors.
So who’s the culprit behind the NFT wash trading of BC #70086? It’s hard to say. Maybe an investor hoped feigned interest would garner a sale. Or perhaps it was the marketplace pumping fake volume to attract investors. Only the perpetrator(s) knows for sure.
What we do know is that if you know where to look, the practice of wash trading is easy to spot. Multiple trades — each at a slightly lower price to ensure coverage of gas fees — will reveal themselves if you study trade history.
So, if you’re excited about adding an NFT to your collection, first do a little digging into its past. You may just save yourself from acquiring a tainted token.
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