A Game of NFTs: Characterizing NFT Wash Trading in the Ethereum Blockchain

TL;DR

This paper investigates wash trading in the Ethereum NFT market, revealing its prevalence, methods of profit, and suggesting the need for protective measures to prevent market manipulation.

Contribution

It provides the first comprehensive analysis of wash trading effects, profitability, and success rates in Ethereum NFTs, highlighting the need for market safeguards.

Findings

Wash trading affects 5.66% of NFT collections.

Artificial volume from wash trading totals over 3.4 billion USD.

Exploiting token rewards yields higher profits and success rates.

Abstract

The Non-Fungible Token (NFT) market in the Ethereum blockchain experienced explosive growth in 2021, with a monthly trade volume reaching \$6 billion in January 2022. However, concerns have emerged about possible wash trading, a form of market manipulation in which one party repeatedly trades an NFT to inflate its volume artificially. Our research examines the effects of wash trading on the NFT market in Ethereum from the beginning until January 2022, using multiple approaches. We find that wash trading affects 5.66% of all NFT collections, with a total artificial volume of \$3,406,110,774. We look at two ways to profit from wash trading: Artificially increasing the price of the NFT and taking advantage of the token reward systems provided by some marketplaces. Our findings show that exploiting the token reward systems of NFTMs is much more profitable (mean gain of successful operations is \$1.055M on LooksRare), more likely to succeed (more than 80% of operations), and less risky than reselling an NFT at a higher price using wash trading (50% of activities result in a loss). Our research highlights that wash trading is frequent in Ethereum and that NFTMs should implement protective mechanisms to stop such illicit behavior.