More Than 30 Billion Dollar Worth of NFTs Traded on the Ethereum Platform Are Wash Trading

According to recent research carried out by Dune Analytics, nearly half of the total NFTs traded on the Ethereum network are accounted for as wash trading.

Wash trading is an illegal and manipulative way of trading that involves investors buying and selling the same particular financial instrument for the purpose of creating the illusion of an impressive volume of trade for the asset. In such shady trading practices, the supposed buyers and sellers are the same people, creating round-trip trading of assets. According to the research carried out by Dune Analytic, the misleading trading tactic, which formally accounted for 58% of the NFT transactions in the last year, has gotten worse as wash trading peaked at about 80% of all non-fungible tokens on the Ethereum network in January.

How wash Trading Is Identified on Trading Platforms
The investigator uses four simple techniques to fish out this type of manipulative trading. The first method that was used to discover wash trading was identifying obvious trades of non-fungible tokens within the same wallet. The second way to discover this type of trading is to identify a cycle trade (or back-and-forth trading) of NFTs between two different wallets. Another way to know a wash trade is if a wallet has bought the same NFT three or more times. And the last method is to determine if the NFT transactions between two wallets have first been funded by another wallet. In other words, it is the case that a trader with multiple wallets funds two of his own wallets so as to make round-trip trades between them. Although about $30 billion in trade worth of NFTs was discovered on the network, this is still a small amount when compared to the other legitimate trade on the network. So, while the majority of trades on the Ethereum network are legitimate, the volume of such trades is low in comparison to the volume of trades in wash trading.

These manipulative systems employed by traders tend to create misleading statistics that paint a picture of a good market for a particular trading instrument. Wash trading is considered illegal in the United States. The challenge here for enforcement agents is that it is difficult to track in the crypto space. Through this way of trading, some criminal activities can be carried out. And scammers, malware operators, and even organized institutions are involved in wash trading.

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