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Chainalysis report finds most NFT wash traders unprofitable

Chainalysis report finds most NFT wash traders unprofitable

Nonfungible tokens (NFT) have taken the world by storm, resulting in mainstream interest and greater option of cryptocurrency. According to blockchain analysis firm Chainalysis, NFT popularity skyrocketed in 2021. Chainalysis’ “NFT Market Report” shows a minimum of $44.2 billion worth of cryptocurrency sent to Ethereum smart contracts associated with NFT marketplaces and collections last year. The report notes that this number was $106 million in 2020.

While impressive, increasing scams and fraudulent activities have infiltrated the NFT space. For instance, major NFT marketplace OpenSea recently announced that its free minting tool was prone to misuse. As a result, OpenSea shared that 80% of NFTs created using this tool were either plagiarized, fake or spam. If that wasn’t b enough, Chainalysis’ latest blog post highlighting its “2022 Crypto Crime Report” found that the NFT sector is vulnerable to wash tring and money laundering.

Wash tring in the NFT sector grows

According to the blog post, wash tring refers to a transaction in which a seller is on both sides of the tre in order to paint a misleing picture of an asset’s value and liquidity. 

Unsurprisingly, wash tring has become a major concern within the NFT sector. Most recently, data generated from the LooksRare NFT marketplace found the platform to be very prone to wash tring.

Yet as wash tring becomes more common across NFT marketplaces, new solutions are being developed to detect fraudulent activity. Kim Grauer, he of research at Chainalysis, told Cointelegraph that the firm has created a potential tool capable of detecting individuals who are self-funding their own crypto wallets to conduct misleing transactions:

“By using Chainalysis software, we can see when a person buys a token using funds from the same person who sold them that very token. This is the definition of wash tring.”

The Chainalysis blog post further explains that by using blockchain analysis, the firm is capable of tracking NFT wash tring by analyzing sales of NFTs to dresses that were self-financed, meaning they were funded either by the selling dress or by the dress that initially funded the selling dress.

Interestingly enough, while Chainalysis found that some NFT sellers have conducted hundreds of wash tres, Grauer pointed out that most NFT wash trers are in fact unprofitable. She said:

“Overall, we found that it’s not profitable to wash tre NFTs because you end up paying a lot in gas fees. Many wash trers came out negative due to the amount spent on gas versus the amount generated from their sales.”

More specifically, Chainalysis’ findings indicate that 152 Ethereum dresses associated with wash trers resulted in losses of $416,984. On the other hand, Grauer pointed out that some wash trers have been successful. Data from Chainalysis shows that 110 Ethereum dresses received $8.9 million in profits from wash tring.

According to Grauer, successful wash trers tend to be individuals conducting multiple NFT tres across a number of platforms. However, she noted that overall, it’s not a good idea to wash tre due to the high costs of gas fees coupled with the fact that all transactions can be seen across the Ethereum blockchain network. “This is a risky type of crime to carry out, and even riskier given that people have to pay large gas fees. Those who do this at scale have to be experienced,” remarked Grauer.

How NFT platforms can keep users safe

Although wash tring NFTs have proven to be risky and unprofitable for most, Grauer believes this activity will become more common as the NFT space continues to grow. “Anyone can easily engage in wash tring — if you can downlo an ETH wallet and purchase an NFT, you can do it,” she remarked. With this in mind, it’s becoming increasingly important for NFT platforms to enforce initiatives to help keep users safe from fraudulent activities.

Alex Salnikov, co-founder and he of product at NFT marketplace Rarible, told Cointelegraph that in terms of what the platform has seen in the broer NFT ecosystem, there tends to be a pattern of users wash tring on platforms that provide incentive rewards for tring. To Salnikov’s point, the LooksRare platform planned to offer user rewards in the form of the platform’s native token, which could have ded to the amount of wash tring on the platform.

Salnikov explained that after realizing this vulnerability, the Rarible decentralized autonomous organization voted to stop RARI token distribution to Rarible users. As a result, “the issue is no longer relevant for our marketplace,” he said, ding that in order to further protect Rarible users, the platform has released a verification system that allows the Rarible team to manually review a creator’s profile. Salnikov elaborated:

“If this process is successful, the user will earn a yellow checkmark on their Rarible marketplace profile. It is important to note that collectibles from unverified creators do not appear in our search results or the explore feed. Users are also warned if they are about to purchase a collectible by an unverified creator or collection.”

While Rarible has taken a number of steps to ensure user safety across the platform, Grauer mentioned that Dapper Labs, a blockchain platform that offers NFT-based products and decentralized apps, is working closely with Chainalysis to monitor wash tring and other illicit activities. 

Additionally, OpenSea published a blog post on Jan. 17 introducing its new “NFT Security Group.” According to the post, members will be expected to share and learn about vulnerability reports that have not been publicly announced in order to fix problems before users are impacted. Members will also focus on creating solutions to ensure greater security around blockchain consensus, smart contacts, wallets and metata, along with awareness for interoperability implications.

Will regulations keep users safe?

In dition to these measures, discussions around NFTs and compliance are coming to fruition. Joseph Weinberg, co-founder of Shyft Network — a compliance-focused blockchain network — told Cointelegraph that while it’s hard to say if NFTs should be regulated, he believes that the space needs oversight:

“I think tring platforms that accept funds — like an OpenSea, for example — will inevitably become regulated as VASPs, as they are in the business of matching to counterparties and they accept fees. As far as how NFTs could be regulated, you can do things like multi-dress hop detection and dress screening to cluster and determine if there’s a likelihood that people are wash tring.”

However, Weinberg remarked that NFTs are still a grey area when it comes to regulations. “Regulators haven’t even been able to give us clear guidance on DeFi [decentralized finance], so I think they’re waiting to see how it plays out,” he said, ding that the biggest challenge currently facing regulators is the fact that art is not a regulated environment:

“Historically, it’s known that art markets are not subject to KYC [Know Your Customer] and AML [Anti-Money Laundering] requirements. It’s also widely known that the art world is where a lot of money laundering takes place — and has for a long time. The question that needs to be asked is if the ‘form’ is different from the ‘function’ because a token has a different set of use cases than a piece of paper.”

As such, Weinberg believes that regulators first need to focus on how NFTs should be approached before coming up with guidance. In the meantime, some industry experts believe that the NFT community will take its own set of actions. Jack O’Holleran, chief operating officer of Skale Labs — a platform developing solutions for Ethereum scalability — told Cointelegraph that he believes free markets will ultimately prevail. “End users will not want to purchase NFTs from sites that don’t clearly remove or call out overt wash tring numbers. NFT trers and purchasers will move their business to exchanges and data aggregation sites that give them real views of market data.”

NFT scams will continue to rise, even with solutions

Unfortunately, even with compliance solutions, initiatives from NFT platforms and possible regulations, Grauer predicts that there will be a rise in criminal activity in the NFT space before there is a decline.

Moreover, while Chainalysis found money laundering associated with NFT dresses to be relatively low in 2021, Grauer expressed concerns that the space will only continue to worsen. “My prediction is that the sector will get worse in many ways before it gets better with industry solutions. It’s possible that some NFT platforms will opt compliance to help things progress.” 

META
ARTICLE: Chainalysis report finds most NFT wash trers unprofitable 
PUBLISHED: 2022-02-06 16:01:00 
SOURCE: https://cointelegraph.com/news/chainalysis-report-finds-most-nft-wash-trers-unprofitable
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