Do Fake Trades Call NFT Market Size into Question?

By Kathy Chu, TruthDAO

Just how big is the NFT market?

By some estimates, sales could top $40 billion this year — $30 billion at the low end. But the proliferation of fake “wash trades” is calling that claim into question.

Blockchain data firms say they can filter out many wash trades by looking for patterns of market manipulation. But as wash trading becomes more sophisticated, it is difficult to catch all these transactions.

“Maybe the market is actually $1 billion. There’s no way to know,” says Priyanka Bose, a doctoral candidate at the University of California at Santa Barbara and one of the lead authors of a study that estimates wash trading occurs in nearly 30% of all NFT collections with more than $2,000 in trading volume.

The surge in wash trading is forcing the crypto industry to pursue inventive ways to detect it, measure it, and filter it out. After an eruption in wash sales overtook the trading platform LooksRare, blockchain analytics firms such as CryptoSlam and Nansen removed NFT trades they believed to be bogus from their sales figures.

The surge in wash trading on LooksRare came after the platform, which launched in January 2022, started giving away tokens based on users’ trading volumes. That sparked a flurry of wash sales as users bought and sold, back and forth, to earn more tokens.

NonFungible, bitsCrunch and other data firms are also working to filter out wash trading, partly spurred by concerns that their NFT sales data would be less usable if wash sales are included.

Saravanan Jaichandaran, co-founder of bitsCrunch, said the company is trying to make the NFT world more transparent so investors are “not lured into the craze shown by this market.”