NFT scam, wash trading tricks new buyers

Focus on a fraud technique adopted by Web3 scammers to artificially boost the value of their NFTs.

You don’t fully understand the concept of NFT. But you have understood that the lucky owners of CryptoPunks, these pixelated characters pioneering CryptoArt, or of Bored Ape Yacht Club, these digital images of anthropomorphic monkeys, have created small fortunes. You too would like to get started. So, beware of the NFT scams that are flourishing and in particular of this technique of wash trading. Its principle? He is as old as the world. Getting you a digital image that no one wants for the deal of the century. And to do so, you have to artificially inflate its value.

Artificially inflate the value of your asset

the wash trading, how it works ? Like a sleight of hand. Address A places a sell order via one of its wallets then sends a buy order using another wallet, associated with an address B. The two addresses are different, the NFT wallets too. However, they belong to the same person. This round trip is performed several times. Goal ? Simulate strong trading activity around the asset in question. Thanks to the multiplication of these transactions, the value of the asset rises; but it will however have to remain higher than that of the transaction fees applied on the various exchanges. When this is not the case, the practice generates losses.

Thanks to the relative anonymity allowed by exchanges in the cryptoasset market, the wash trading prosperous. Certainly, in theory, all exchanges are traced on blockchains, in particular thanks to smart contracts. But in practice, the process of authenticating addresses is long, and most people involved in online transactions don’t follow it. Furthermore, since non-fungible tokens are not considered securities, they are not subject to the same financial regulations as those that apply to shares.

Wash trading : 8.9 million dollars in profits earned in 2021

chain analysis, a platform specializing in data analysis on different blockchains, has just published an alarming report. The year 2021 has seen cryptocurrency exchanges explode: $44.2 billion (3.7 billion euros) were exchanged for NFTs on the various blockchains. Of these 4.2 billion, Chainalysis reports that the profits made through the fraudulent practice of wash trading reach 8.9 million dollars (7.8 million euros). The losses associated with this practice are only estimated at nearly 420,000 dollars (370,000 euros). One could conclude that it is not that important. But according to Chainalysis, this practice experienced a very significant increase in the third quarter of 2021, and continued at the end of the year.

The phenomenon was made public in March 2021, when the platform Coinbase was fined $6.5 million by a US regulator for turning a blind eye to the existence of automatic trading algorithms, intended to fuel the practice wash trading. A little later, in November 2021, the tech media Bloomberg pinned the case of CryptoPunk #9998. “Sold” for half a million dollars (532 million to be exact, or 468 million euros), the pixelated character had in fact only passed between two addresses belonging to the same person, via the Ethereum blockchain and thanks to a type loan flash loan made on this same blockchain.

Wash tradingNFT counterfeits, money laundering… The Web3 economy is still largely a deregulated Wild West, in which criminal practices play elbow-to-elbow with the emancipatory values ​​held by certain actors and actresses.

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