Something Smells Fishy in the Wild NFT Market
- Even though abusive trading practices are being detected in the non-fungible token industry, the activity is not illegal as there are no clear rules.
- A review carried out by Reuters detected several purchases – sales where the price of the assets traded registered an unusual price increase in a short time.
- This dark trade involving billions in irregular sales is promoted through NFT trading platforms, including LooksRare.
Certain movements in the non-fungible token (NFT) market are beginning to raise suspicions and set off alarm bells. On January 12, a digital image of a pixelated person from “Meebit” was sold at a price in cryptocurrencies equivalent to $50.6 million, Reuters reported.
What was striking is that five minutes later, that same image of a man dressed in purple shorts and green sneakers was purchased by the original seller for approximately $49.6 million.
The practice of wash trading as well as money laundering through NFTs is becoming more and more prevalent. Recently, the global data, research, and industry analysis firm Chainalysis published a report that accounts for this type of illegal trade.
Booming wash trade
The great popularity that non-fungible tokens have obtained since 2021 and the lack of regulations in many countries, are creating a wild market for NFTs that could lend itself to all kinds of scams and abusive business practices.
The Meebit exchange took place between two anonymous cryptocurrency wallets. In these cases, it usually happens that the seller and the buyer agree to artificially inflate the price of the token. Both wallets belong to the same seller – buyer, according to Chainalysis research.
Although the underlying blockchain technology allows all transactions to be recorded, the names of the parties involved are not. This makes it easy to wash trade for merchants with more than one wallet, who can make dummy sales over and over again to simulate that a token is trading very well.
The digital image, which can be used as an avatar in the metaverse by its owner, was available alongside others on the LooksRare marketplace. The price of the image quickly climbed after the suspicious transactions to reach unusually high levels, Reuters said.
"Another Meebit NFT, this one in a sporty outfit and ponytail, was sent between three wallets in over 100 sales, mostly in the $3-15 million range," noted Reuters' review during the week of 12-12. January 19.
Likewise, in January, “a ‘loot’ bag NFT, representing virtual equipment for online adventure games, was exchanged across 75 sales between two other wallets for $ 30,000- $ 800,000 at a time,” the news agency noted.
On the Flipside
- This huge flow of trade has seen LooksRare’s online marketplace generate close to $10.8 billion in trading volume since it launched in early January of this year, according to data from market tracker DappRadar.
It is no coincidence that two of the wallets listed on LooksRare concentrated “the 27 most expensive recorded sales in the entire NFT industry in January, totaling $1.3 billion,” according to data provided by DappRadar as of 31 January.
On the other hand, 2.3 billion dollars that totaled the top 100 sales during the month, came from 16 wallets traded on that platform.
DappRadar CFO Modesta Masoit commented: “There’s a lot of activity going on between a couple of wallets – let’s say wallet one sells to wallet two, and then wallet two resells it. It’s quite likely that this is not a real demand, that these trades are not organic.”
Another data service provider that reported suspicious transactions on LookRare was CryptoSlam. Along with DappRadar, the industry data aggregator believes the two exchanges could be part of a rewards structure that the platform employs. However, the platform also registers “real” activity, according to Masoit.
LooksRare admits that they are “very risky” practices
Asked if merchants are artificially inflating trading volume, the company spokesman said “such practices were very risky” because merchants had “to pay transaction costs that they were not guaranteed to cover.”
LooksRare's structure is "designed to reduce the long-term viability of LOOKS' 'dividend farming'," the spokesman added to Reuters.
But for L’Atelier CEO John Egan, it’s clear that the LooksRare transactions reviewed by Reuters are “laundry operations” that could not be admitted in traditional regulated markets.
The technology research and analysis firm explained that the deception consists of giving a “False impression of demand for an asset.” Although the company is not to blame for what the merchants do, he clarified.
Furthermore, artificially increasing the prices of NFTs traded on the market are also not illegal because there are simply no clear rules. It is essentially a wild and expanding market, blockchain industry experts point out.
Why You Should Care
- In 2021, NFT trading generated a turnover of $25 billion, indicating the levels of speculation reached.
- On its website, LooksRare bills itself as “the premier community NFT marketplace with rewards for participating.”
- Following its extraordinary growth, market analysts are following its footsteps more closely, looking for clues about its business practices.
The company’s reward system awards tokens (called LOOKS) to merchants who manage to accumulate higher total sales volumes where they act as intermediaries.
LOOKS can be used during “staking,” a process during which “a portion of the platform’s revenue is claimed from the 2% fee charged on all transactions,” Reuters quoted a LooksRare spokesperson as saying.
Read more: https://dailycoin.com/something-smells-fishy-in-the-wild-nft-market/
Text source: DailyCoin.com
