Nonfungible tokens (NFT) have taken the world by storm, resulting in mainstream interest and greater adoption 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 bad enough, Chainalysis’ latest blog post highlighting its “2022 Crypto Crime Report” found that the NFT sector is vulnerable to wash trading and money laundering.
Wash trading in the NFT sector grows
According to the blog post, wash trading refers to a transaction in which a seller is on both sides of the trade in order to paint a misleading picture of an asset’s value and liquidity.
Unsurprisingly, wash trading 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 trading.
Yet as wash trading becomes more common across NFT marketplaces, new solutions are being developed to detect fraudulent activity. Kim Grauer, head 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 misleading 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 trading.”
The Chainalysis blog post further explains that by using blockchain analysis, the firm is capable of tracking NFT wash trading by…