Let’s start with a nice definition of wash trading. According to Investopedia, “Wash trading is an illegal type of trading in which a broker and trader collude to make profits by feeding misleading information to the market.”
How does this pertain to NFTs? On platforms such as LooksRare, a series of two or more wallets can easily be seen trading NFTs at higher than usual prices to drive up the floor price. Twitter users djo.eth & cryptoslam! have called this out, and the NFT community is looking to hear the response from trading platforms involved.
The cause and effect here is a doozy. With so many fantastic projects out there scrambling to get eyes on their projects, and the ultimate goal being to get visibility on their project – wash trading is mucking up the waters. Particularly with the earning potential of LooksRare. Users earn $looks on eligible collections, so it’s easy to see the incentives, not so easy to see the solution.
Projects such as Meebits & Terraforms by Mathcastles, Loot and CryptoPhunks
have been the main focus for the majority of this phenomenon on LooksRare. The official LooksRare blog reports the trading fees would be too high to incentivize wash trading, however the analytics tell a different story.
With the NFT and web3 space being vastly unregulated at the moment, it may be some time before we see any major stops in this practice, however the take away is to do your own research. Who is buying the projects, who are they selling to, and is the price reasonable?
As always – happy hunting and do your own research.