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The scourge of NFT wash trading — and how not to get suckered in

The scourge of NFT wash trading — and how not to get suckered in

What are the different kinds of NFT wash trading, and what are the red flags that a prospective investor should look for? Anndy Lian explains.

Wash trading is not a new word for people in the financial world. You probably have heard from friends that cryptocurrencies are highly “washed” and round-tripping with the same buy and systematically sell price. Since you are familiar with this term, let me tell you the NFT market has similar issues with wash trading.

In a nutshell, wash trading makes it difficult for non-fungible token enthusiasts to gauge genuine market interest in NFT collections. It also inflates and skews the amount of trading in marketplaces, misleading analysts about what’s going on on trading platforms.

All in all, NFT wash trading is one of the biggest impediments to accurately evaluating projects and assets in the NFT industry, which includes NFT collections, NFT tertiary tokens (think $X2Y2 and $LOOKS) and the studios and developers who bring products to market.

Using Footprint Analytics’ data set to detect and filter wash trading, let us take a closer look at how wash traders operate and how on-chain data could be analyzed to detect suspicious activity.

What is wash trading?

Wash trading is a form of market manipulation where an investor simultaneously sells and buys the same financial instruments to create misleading, artificial activity in the marketplace.

In terms of NFTs, wash trading occurs when the same user is behind both sides of an NFT transaction. It means that both the seller and buyer address is actually owned by the same person. At the moment, wash trading is very common in NFT markets, which are not subject to government regulation or supervision, unlike traditional securities.

Why do people wash trade NFTs? 

There are two main motives behind wash trading in the NFT space.

Type 1: To earn platform rewards 

Type 2: To create an appearance of value or liquidity 

To create a false sense of liquidity and an inflated value of a specific NFT collection or asset, some unscrupulous creators turn to wash trading to deceive buyers. They profit when genuine buyers are tricked into buying an NFT from them at a pumped-up price. This type of wash trader hides their activities with new wallet addresses that are self-funded from central exchange wallets. This type of wash trading generates a relatively small volume, which is not as disruptive to the market as Type 1 wash trading.

How is wash trading done?

Due to Type 1 wash trading transactions’ disruptiveness to NFT transaction data, Footprint Analytics aimed to filter them out as much as possible. To understand this type of wash trading, we have to understand the token reward system of X2Y2 and LooksRare. In simple terms, X2Y2 and LooksRare distribute tokens daily to both sellers and buyers based on the address’s trading volume as a portion of the marketplace platform’s daily total volume. Token rewards are fixed daily, so wash traders can wash trade and earn reward tokens repeatedly when the daily distribution resets.

Figure 1 shows an example of wash trading activities on the X2Y2 marketplace— the NFT collection is Dreadfulz.

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Figure 1 –  Dreadfulz Wash Trading Example (Source: @Hanson520 Footprint Analytics)

As we can see from the figure above, the same NFT (ID 164) was bought back and forth between the same two wallets several times in a day with 300+ ETH sale prices per transaction. On Sept. 1, 2022, these two addresses traded 19 times, generating 7228 ETH in volume and paying 36.14 ETH in X2Y2 platform fees. Keep in mind that the royalty fee rate for Dreadfulz was not set on X2Y2; therefore, no creator fees were paid. Wash traders will choose collections with 0% creator fees to minimize their wash trading costs.

How to detect wash trading

I have looked at how a few analytics platforms, including Footprint Analytics, do their detection and followed their logic. Their methodologies are somewhat similar, to be honest. Along with my own knowledge and analysis, here is a checklist of suspicious data and activity that should trigger any prospective NFT buyer’s alarm bells:

  • A particular NFT is traded by the same address more than X times a day while the rest of the collection remains untouched.
  • The same address is trading the same NFT in a high-frequency manner.
  • A collection of NFT goes into a self-selling in a high-frequency manner when there is no marketing or promotion backing the sale.
  • The average historical price transacted is X times higher on marketplace A vs. B.
  • The sale price of an NFT is transacted X times higher than the lowest-priced NFT available for sale.
  • The same wallet addresses funding all the suspicious wallets that buy and sell the NFTs.
  • An abnormal high trading volume on a constant basis.

The above assumptions are not perfect, and I hope to work with researchers on developing a more comprehensive scorecard to determine NFT trends and behaviors more effectively. The ability to trace multiple wallets over time to identify various levels of relationships would be vital too.

How wash-traded are the top NFT collections?

In Figure 2, Footprint Analytics applied their detection rules to the collections with the most trading volume on X2Y2 and LooksRare.

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Figure 2 – Wash Trades Stats of Selected Collections (Source: Footprint Analytics)   

Based on their rules, they have detected that 95% or more of the trading volume of these collections is wash trading transactions. Wash trading makes up an extremely high percentage of trading volume for these collections, which paints a misleading picture of the collections’ historical volume and sale activities. You can review all the transactions they have filtered at ud_suspicous_txn dataset on their website.

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Figure 3 – Wash Trading Stats of Blue Chip Collections (Source: Footprint Analytics) 

For Footprint Analytics to ensure their rules are working as intended, they have applied them to blue chip collections that are not subjected to wash trading activities in Figure 3. You can view the ud_suspicious_txn_bluechip_collections dataset and review the filtered transactions.

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Figure 4 – Wash Trading Stats of LooksRare and X2Y2 (Source: Footprint Analytics) 
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Figure 5 – Unfiltered Trading Stats of Opensea, LooksRare and X2Y2 (Source: Footprint Analytics) 

Figure 4 indicates that 94.71% and 81.04% of the trading volume on LooksRare and X2Y2 are wash trading transactions, which appears consistent with the marketplace statistics, as shown in Figure 5. We can see from the unfiltered data that the average price per transaction on Looksrare almost reaches US$85,000, which is around 90 times the average price of OpenSea and unrealistically expensive.

You can view the ud_suspicious_txn_x2_looks dataset and review the filtered transactions for X2Y2 and Looksrare marketplaces, as shown in Figure 4.

Final takeaways 

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Figure 6 – Monthly NFT Volume Stats of OpenSea, LooksRare and X2Y2 (Source: Footprint Analytics) 

Looking at the monthly trading statistics of the NFT market since January 2022 in Figure 6, we can see that wash trading volume makes up more than 50% of total volume almost every month. Even though total volume is down by a substantial amount from January highs, the percentage of wash trading volume in the NFT market remains similar every month. This underscores how disruptive wash trading is to having accurate NFT transaction data and the importance of filtering out wash trading for any meaningful NFT data analysis.

 

Source: How to detect NFT wash trading and not get suckered in (forkast.news)

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
j j j

The X-to-Earn model: Eat, sleep, do almost anything and get paid in crypto

The X-to-Earn model: Eat, sleep, do almost anything and get paid in crypto

Are you a good runner? Or eater? Or sleeper? Chances are whatever you’re good at, there’s a Web3 project out there to reward you in crypto. But do the tokenomics stack up?

Axie Infinity — a non-fungible token-based online video game that’s generated over US$4 billion in secondary NFT sales — is credited with kicking off the so-called “play-to-earn” (P2E) craze, allowing gamers to earn money while playing. While the Axie hype has somewhat died down, it also spawned a series of copycat projects that pay users to perform everyday activities.

These projects have developed into an industry of their own; a sort of “X-activity-to-earn” (X2E) model, now including tie-ins with brands from Asics to European soccer clubs, paying users in cryptocurrency for running, eating or even sleeping.

Perhaps not surprisingly, questions are being raised about the economic principles many of these projects are founded on.

“The problem with some of these X2E models is that it seems like a really good innovation, but then it is just purely a Ponzi [scheme],” said Anndy Lian, author of the new book “NFT: From Zero to Hero,” in an interview with Forkast, though he did not mention any by name. “And it’s actually very disturbing, to be really honest.”

Without ongoing revenue to support what is being paid out, Lian said, the X2E model risks becoming an unsustainable compensation structure, relying on the hope that more people will come in to “pay” for the tokens that were previously dropped.

There were similar accusations leveled at Axie Infinity after a period of explosive growth failed to generate earlier returns for its users, as its native token SLP is now trading at US$0.004 at press time after reaching as high as US$0.41 in May 2021.

Running tokenomics

One of the more popular variations of this new industry model is the “Move-to-Earn” (M2E) project StepN, which pays users in cryptocurrency for walking, jogging or cycling by tracking their movements via GPS on their phone.

To participate in the project, users buy NFT sneakers and hold them in their wallets on their phones when they go for a walk and are then compensated for the exercise in the project’s native currency, Green Satoshi Tokens (GST).

Users then cash out GST for profit or invest it back into the project to mint additional NFTs for other users to buy.

Brian Lu, founding partner of investment fund Infinity Ventures Crypto, is more optimistic about the outlook for these projects than Lian, however, telling Forkast in an interview there are ways such projects can be successful.

“There’s always going to [need to] be people to support the token or the token has to have some type of utility [for the project to work],” he said.

StepN does this by allowing users to cash out their GST for profit or by investing it back into the ecosystem to mint more sneaker NFTs. This was the tokenomics model initially adopted by Axie Infinity, which allowed users to cash out their SLP or to re-invest it back to create more “Axies” — Pokémon-like creatures that players bred and battled to earn more SLP.

After launching in December, GST reached a high of US$9.03 in late April before the crash along with the rest of the crypto market in May. Despite tie-ins with sports-brand Asics and Spanish soccer club Atlético de Madrid, GST had fallen to under US$1 by early June, and has been trading under US$0.10 since early July.

Sleeping on the job

Positioning itself in direct response to the Move-to-Earn projects, Gang Azit Social Club (GASC) has taken a different approach, and wants to remind users that it’s important for one’s mental health to take a break and relax from time to time, and incentivizes this practice by paying them to do just that.

Calling itself a “Relax-to-Earn” project, GASC detects when users are within a predetermined zone using GPS and pays them in the project’s HIPS token if they press a “relax” button on their phone while in the space.

If anyone needs an incentive to eat, Esca — an online marketplace for food consumers and vendors — promises to pay customers, restaurants and at-home chefs in both Bitcoin and USDC. According to its website, Esca thinks the commissions charged by most food delivery platforms are too high and is using cryptocurrency to balance the equation.

So many projects have popped up promising to pay users to sleep that there is even its own category of finance for the industry — SleepFi.

The Sleepee app pays users based on their sleep quality score in its native currency, which can be converted to buy products or services in their store. Even the Move-to-Earn app MetaGym offers a SleepFi feature that pays users in its native token that can be spent in-app or cashed out for USDC.

The future of Web3 and gaming

Measuring the success of these projects over the past few months has been difficult amid the broader crypto downturn, which has seen even well-established crypto funds and businesses file for bankruptcy or needing a bailout.

If the situation doesn’t improve soon, Lu says there are other options available to such projects.

“These X2E projects that are coming up [are] going to start learning to advertise their users and their user’s behavior [and] user data to marketing companies that are willing to pay for it,” said Lu, explaining this process will become more commonplace as brand tie-in continues to gain traction.

Selling user data may seem against the ethos of Web3, which is often touted to offer a new incentive model to break away from the data mining method of business which has led to massive wealth concentration from a few giant tech companies.

Back to the genre that started it all, Lu says the industry has learned its lesson from the short-lived success of Axie Infinity and is shifting from Play-to-Earn to Play-and-Earn, or Web 2.5.

These projects are putting gameplay back at the center of the game, with the option to earn money — sometimes even in fiat — a bonus element rather than making a game whose main draw card is earning.

Lian is hopeful these types of games can still survive in the meantime, but says it will be a long time before the mainstream gaming industry adopts Web3 in any meaningful way.

“I don’t think the super app is coming anytime soon,” said Lian, who explained the technology is there but the US$300 billion a year gaming industry has little incentive to change. “[Game studios] might not be agreeable to how it is actually going to help them since they are really making millions of dollars in revenue every year.”

 

Source: https://forkast.news/x-to-earn-model-eat-sleep-anything-paid-crypto/

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
j j j

As Bitcoin price briefly goes above $20,000 mark industry observers say, ‘Don’t get happy too early’

As Bitcoin price briefly goes above $20,000 mark industry observers say, ‘Don’t get happy too early’

As per reports, a brief rise in crypto price was witnessed in the last 24 hours and sentiment has temporarily improved.

 

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
j j j