Something Smells Fishy in the Wild NFT Market

  • Even though abusive trading practices have been identified in the non-fungible token industry, the activity has not been deemed illegal as there are no clear rules around it.
  • A review carried out by Reuters detected several purchases – sales in which the price of the assets traded registered an unusual price increase within a short period.
  • This illicit trade involving billions in irregular sales was promoted through NFT trading platforms, including LooksRare.

Certain movements in the non-fungible token (NFT) market have begun to raise suspicions and set off alarm bells. On January 12th, a digital pixel art image depicting a person from the “Meebit” collection was sold at a price in cryptocurrencies equivalent to a value of $50.6 million, Reuters reported.

What was striking about this particular sale, compared to many others, is that five minutes later, the same image of a man dressed in purple shorts and green sneakers was repurchased by the original seller for approximately $49.6 million.

The practice of wash trading, as well as money laundering, through NFTs is becoming more and more prevalent. Recently, global data, research, and industry analysis firm Chainalysis, published a report with accounts of such illegal trades.

A Booming Wash Trade

The electric popularity that non-fungible tokens have obtained since 2021, and the lack of regulations around them in many countries, have generated a wild market that lends itself to all kinds of scams and abusive business practices.

The Meebit exchange took place between two anonymous cryptocurrency wallets. In such instances, it is typically an arrangement between the two parties to artificially inflate the price of the token. Both wallets belong to the same seller and buyer, according to Chainalysis research.

Although the underlying blockchain technology allows all transactions to be recorded, the names of the involved parties involved are not. This makes it easy for bad actors to wash trade with multiple wallets by making dummy sales over and over again to simulate the belief that a token is trading very well.

The digital image, which can be used by its owner as an avatar in the metaverse, was made available alongside many others on the LooksRare marketplace. The price of the image quickly climbed after suspicious transactions boosted it to reach unusually high levels, Reuters said.

"Another Meebit NFT, this one in a sporty outfit and ponytail, was sent between three wallets in over 100 sales, mostly in the $3-15 million range," noted Reuters' review during the week of 12-12. January 19th.
Likewise, in January, “a ‘loot’ bag NFT, representing virtual equipment for online adventure games, was exchanged across 75 sales between two other wallets for $ 30,000- $ 800,000 at a time,” the news agency reported. 

On the Flipside

  • This huge flow of trade has seen LooksRare’s online marketplace generate close to $10.8 billion in trading volume since it launched in early January this year, according to data from market tracker DappRadar.
It is no coincidence that two of the wallets listed on LooksRare concentrated “the 27 most expensive recorded sales in the entire NFT industry in January, totaling $1.3 billion,” according to data provided by DappRadar as of January 31st.

On the other hand, $2.3 billion generated by the top 100 sales during the month came from 16 wallets trading on the platform.

DappRadar CFO Modesta Masoit remarked:

“There’s a lot of activity going on between a couple of wallets – let’s say wallet one sells to wallet two, and then wallet two resells it. It’s quite likely that this is not a real demand, that these trades are not organic.”

Another data service provider reporting suspicious transactions on LookRare was CryptoSlam. Along with DappRadar, the industry data aggregator believes the two exchanges could be part of a rewards structure employed by the platform, or perhaps exploiting it. However, the platform also registers “real” activity, according to Masoit.

LooksRare Admits “Very Risky” Practices

When asked whether merchants were artificially inflating their trading volumes, the company spokesman said “such practices were very risky” because merchants had “to pay transaction costs that they were not guaranteed to cover.”

LooksRare's structure is "designed to reduce the long-term viability of LOOKS' 'dividend farming,'" the spokesman explained to Reuters.

But for L’Atelier CEO John Egan, it’s clear that the LooksRare transactions reviewed by Reuters are “laundry operations” that could not be administered in traditional regulated markets.

The technology research and analysis firm explained that the deception consists of giving a “False impression of demand for an asset,” though the company is not to blame for what the merchants do, he clarified.

Furthermore, artificially increasing the prices of NFTs traded on the market is not illegal on the technicality that there are simply no clear guidelines around the matter. It is essentially a wild and expanding market, blockchain industry experts pointed out.

Why You Should Care

  • In 2021, the NFT trade generated a turnover of $25 billion, indicating the levels of speculation reached.
  • On its website, LooksRare bills itself as “the premier community NFT marketplace with rewards for participation.”
  • Following its extraordinary growth, market analysts have tracked its movements more carefully, looking for clues to explain its hasty business practices.

The company’s reward system awards tokens, called ‘LOOKS, to merchants who manage to accumulate high total sales volumes where they act as intermediaries.

LOOKS can be used during “staking,” a process during which “a portion of the platform’s revenue is claimed from the 2% fee charged on all transactions,” Reuters quoted a LooksRare spokesperson as saying. 


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