Activity Increased As A Result Of Token Rewards From LooksRare and X2Y2.
Around $20 billion worth of trading occurred in one month, setting a record that many industry players definitely want to reach again.
New information from the anonymous researcher known as hildobby, who is skilled in on-chain analytics, paints a different picture of that period: nearly 80% of deals in January 2022 were wash trades.
Since it distorts fundamental information that we use to track marketplace activity, the surge in wash trading made life difficult for data analysts like myself, Hildobby stated.
Wash trading is when individuals exchange assets between their own accounts, typically to inflate interest in a certain enterprise. In this instance, NFT traders took action in order to benefit from the token incentives that some markets offered their participants in exchange for participation.
LooksRare, where transactions account for over 98% of traffic, and X2Y2, with 87%, are the leading exchanges for wash trading.
When they debuted, LooksRare and X2Y2 both provided sizable token incentives in an effort to capture market share. Naturally, NFT traders took advantage of the lack of royalties at the time by washing trading NFTs like Meebits. The Defiant covered the phenomenon in a January article.
However, the researcher was able to estimate the total volume of wash trading in NFTs according to Hildobby’s approach. Not surprisingly, 44.5% of the $30B in total NFT trading volume appears to be wash transactions.
Artificial volume inflation is nothing new; in fact, wash trading was outlawed in the United States in 1936 by the Commodity Exchange Act. Despite the regulation, there have been violations; as recently as 2021, the Securities and Exchange Commission prosecuted two people with wash trading meme stocks.
Hildobby’s analysis has some encouraging points, such as the fact that wash trading on OpenSea, the main NFT platform, accounted for only 2.3% of volume.
Another benefit of hildobby’s research is that while the NFT market is down, the decline is not as severe as first thought. The all-time high for organic weekly trades was actually reached in late August 2021 as opposed to the widely believed January 2022, as seen by the analyst’s wash trading filter.
NFT trading volume is down 89.5% as of late December compared to the organic weekly high of $1.8B in August 2021. Even while it is a significant decline, it is not quite the 95% massacre seen by the NFT space in January’s $5B+ weeks.
Hildobby used four distinct filters to exclude wash trades. A clear indication that a trade isn’t organic was the analyst’s decision to reject all NFT purchases if the buyer and seller were from the same wallet.
Second, Hildobby eliminated any transactions that switched between two wallets, which is another indication of inorganic demand.
Third, the analyst pulled out wallets that had three or more purchases of the same NFT.
Last but not least, Hildobby eliminated transactions when the same wallet was used to finance both the buyer and the seller.
Due in large part to their efforts in developing community dashboards on Dune Analytics, an on-chain data platform, Hildobby joined venture capital company Dragonfly in May.
