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

TL;DR

This work investigates NFT wash trading on Ethereum from inception through January 2022 using a large blockchain dataset of ERC-721 transfers and multiple detection methods. It identifies $12{,}413$ confirmed wash-trading events moving about $3.406$ billion in artificial volume, with the LooksRare reward system driving a dominant share of activity. It further characterizes trading patterns, lifetimes, and profitability, showing that exploiting marketplace rewards yields substantially higher gains and success rates than conventional price manipulation, underscoring the need for protective mechanisms by NFT marketplaces. The findings inform market integrity practices and policy design for NFT ecosystems.

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.

Figures (7)

• Figure 1: Examples of common funders and common exits. The dotted lines indicate transfers of ERC-20 tokens or Ether, while the solid ones represent an NFT transfer.
• Figure 2: Venn diagram of the wash trading activities detected by each approach.
• Figure 3: Wash trading volumes on different NFTMs.
• Figure 4: CDF of the lifetime of the wash trading activities. The orange dot shows the number of activities with a lifetime equal to or lower than one day, while the blue dot the number of activities with a lifetime equal to or lower than ten days.
• Figure 5: The circles indicate the occurrences of wash trading activities on the top 10 collections for the number of NFTs affected, while the diamonds represent the creation date of the collection.