Photo: Unsplash
Photo: Unsplash

2021 was the year of NFTs. According to a recent report by blockchain analytics firm Chainalysis, $44.2 billion in cryptocurrency was sent to ERC-721 and ERC-1155 contracts in 2021, up from $106 million in 2020.

ERC-721 and ERC-1155 are the two types of Ethereum smart contracts associated with NFT marketplaces and collections.

According to the Chainalysis 2022 Crypto Crime Report, the average value per NFT transaction peaked at the end of October and beginning of November at around $2,400. But there's a chance that certain NFTs aren't worth as much as they seem.

A significant portion of NFT trade volume is connected to illicit activity. One form of illicit NFT activity is called wash trading.

Wash trading involves a transaction in which the seller is on both sides of the trade. It's an attempt to make trading volume appear greater than it is. With NFTs, wash trading aims to make an NFT or an NFT collection appear more valuable than it actually is by selling it to new wallet -- or a series of new wallets -- controlled by the original owner.

Basically, wash trading is the owner of an NFT selling it to himself to inflate its price.

Chainalysis tracked addresses that were self-financed, meaning they were funded either by the seller or by an address connected to the seller.

The graph below shows that one seller, referred to as "Seller 1," made 830 NFT sales to self-financed addresses.

Source: Chainalysis
Source: Chainalysis

However, it seems that Seller 1, if acting alone, didn't make out with a profit. Seller 1 spent $35,642 on gas fees, but only made $27,258 in revenue from sales. This is a profit of -$8,383.

It seems reasonable, then, to conclude that wash traders need to act in groups or collectives to make a profit.

Among the wash traders Chainalysis identified, 262 users sold NFTs to self-financed addresses more than 25 times.

Among these 262 wash traders, only 110 were profitable. The remaining 152 were unprofitable, losing a total of $416,985.

However, the 110 profitable wash traders ended up making $8.87 million. This more than eclipses the amount in cumulative losses.

Chainalysis didn't provide any conclusive evidence, however, that wash traders work in groups or collectives to make a cumulative profit.

Wash trading is prohibited in conventional securities and futures, but no current law addresses wash trading in NFT marketplaces. It remains to be seen whether regulators will crack down on marketplaces or marketplaces will self-regulate.

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