A Primer on NFT Wash Trading

Introduction

NFT wash trading is a subset of price manipulation that occurs for two main reasons. The primary reason is to earn trading rewards from incentivized platforms such as LooksRare and X2Y2. These platforms are indifferent about artificial volume, as their token stakers benefit. The second reason is to manipulate the historical price and volume of an NFT collection. Deceiving potential buyers is generally uncommon and unsuccessful, but it exists. 

Another form of price manipulation is “floor sweeping.” Floor NFTs purchased in bulk significantly raise the floor price, as NFTs are illiquid by nature. The goal is to create FOMO from speculators and offload the NFTs at a higher price. Other traders sweep collections to front run an expected rise in value. 

This report will give a primer on NFT wash trading: its prevalence, detection methods, and future solutions.

The Current State of NFT Wash Trading

NFT Wash Trading on Ethereum

98% of all NFT volume resulted from organic transactions in 2021. NFTs boomed, with collections such as CryptoPunks, Art Blocks, and Hashmasks creating a wave of digital art connoisseurs in the Ethereum metaverse. Genuine collecting and trading outweighed the activity of market manipulators. Bad actors attempted to offload artificially inflated NFTs onto naive speculators, yet there was little incentive to wash trade. Successfully misleading novice participants was the sole purpose, which was costly and ineffective before the launch of incentivized marketplaces.

In January 2022, 72% of NFT trading volume on Ethereum resulted from wash trading. LooksRare vampire attacked OpenSea by airdropping users LOOKS tokens and simultaneously launching t