Wash Trading on NFT Marketplace Blur: An Analysis

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Using tokenized trading incentives, up and coming NFT marketplace Blur has just overtaken OpenSea to take the #1 spot in the NFT industry. The reasons for it are unknown and a cause for speculation in the sector. Because of this, a major Web3 analytics company has discounted a large portion of the most recent trade data from the Blur marketplace.

Due to “market manipulation,” CryptoSlam, a top website for tracking NFT sales, said on Friday that it will delete All deals totaling $577 million from its database. Also, the company announced that it will filter upcoming Blur trades on its platform using a modified algorithm that would exclude any sales that it deemed suspect.

According to on-chain data, whales—traders who hold sizable positions in a particular asset—are primarily responsible for Blur’s sudden increase in NFT trading volume. Whales frequently buy and sell NFTs through the marketplace’s bid pools in an effort to “farm” token rewards for the upcoming airdrop. Nonetheless, there is still debate in the industry as to whether token flipping a la DeFi actually qualifies as wash trading.

For its side, Blur cites statistics compiled by Dune Analytics that demonstrates a far lower proportion of wash trading on their platform. CryptoSlam has verified that it has enhanced its technology to identify purported wash deals. So is this only a semantic quarrel or a debate about how to perceive what is actually taking place at this moment in the quickly evolving NFT space?

A Dynamic Area

CryptoSlam provided an explanation for the selection to exclude a significant portion of the most recent Blur trade data in an email to subscribers on Friday. According to the platform, 1% of high-value NFT traders are responsible for the majority of Blur’s recent trading activity. These traders are flipping NFTs quickly in an effort to profit from the market.

In the email, CryptoSlam stated that this “misrepresents the existing NFT market” and “puts traders at risk who frequently track projects’ growing activity.”

💥CryptoSlam Update: We're Cleaning Up the Wash Trades

⚡️We're taking action to remove nearly $500 Million in wash trades, retroactively as well as applying an updated algorithm to prevent future wash trades.

⚡️This comes after they took similar action https://t.co/ArHdTqRe08…

— CryptoSlam! (@cryptoslamio) February 24, 2023

As of Monday morning, that amount had increased to over $824 million, or more than 80% of the $1.02 billion in total NFT trading activity that Blur has seen since the marketplace began its BLUR token airdrop on February 14. Blur’s trade history from its October 2022 launch up until the airdrop has not yet been fully analyzed by CryptoSlam.

Contrarily, according to CryptoSlam, competitor exchange OpenSea permitted “wash deals” of around $6.6 million between February 14 and early Monday, coming up to about 2.5% of its overall trading activity. In other words, according to CryptoSlam’s standards, OpenSea continues to handle a higher volume of organic NFT trade than Blur.

When a trader buys and sells NFTs between their own wallets, frequently at inflated prices, or when numerous traders do the same in a coordinated manner, this is known as wash trading in the NFT sector. As shown with prior NFT markets like LooksRare and X2Y2, it is often done to influence trading volume data or game token reward schemes.

The founder and CEO of CryptoSlam, Randy Wasinger, said in an interview with Decrypt that the business believes unfiltered trade data presents an erroneous image of trading trends. He said that it is the responsibility of CryptoSlam to distinguish “real sales from wash, farming, or other fraudulent on-chain trades.”

According to Wasinger,

In their battle with OpenSea and other markets, Blur recently instituted token farming incentives, which are the cause of these reported transactions. These are not independent business dealings between unconnected buyers and sellers.

With the airdrop of its own Ethereum token on February 14, Blur surpassed OpenSea in terms of overall trading volume. Based on the token’s current value, Blur gave out almost $290 million worth of free BLUR tokens to traders and said that it will be doing another similar airdrop as part of its “Season 2” campaign.

The gamified incentives scheme of Blur offers free tokens to users that trade through its bidding pools and only utilize the network, excluding competitors like OpenSea or X2Y2. According to statistics from DappRadar, the market has created total NFT deals worth over $487 million just in the past week.

In reality, the market’s most active users purchase and sell assets often, with certain NFTs being flipped multiple times each day. Over 50% of Blur’s NFT trading activity is produced by just 300 wallets, according to public blockchain data that appeared last week, while 1% of traders (565 wallets) account for 74% of the entire asset value that is locked in Blur’s bid pools.

In other words, the data is being severely skewed by a very small number of people who are mass-trading NFTs like fungible tokens. Nonetheless, OpenSea continues to have more daily wallets making trades despite Blur taking the lead in terms of raw NFT trading volume.

Ambiguous Phrases

When questioned on Friday regarding CryptoSlam’s assertion that it had handled $577 million for “wash trades” from the February 14 airdrop up until that point, a Blur representative referred to another source—a Dune dashboard built using public blockchain data and created by fictitious Web3 data analyst Hildobby.

Since Blur’s October debut, over $345 million in wash trading has taken place, accounting for roughly 14% of its entire recorded volume, according to his Dune dashboard. Before of the latest rise, he also deemed Blur’s trading volume “legit” in early February and described his tracking process for wash transactions on NFT exchanges.

Looks like @blur_io has seen more (wash excluded) trading volume than @opensea almost every day in the first half of February 🔥

Source: https://t.co/yPbPkHn08h pic.twitter.com/beigRmpKW4

— hildobby (@hildobby_) February 15, 2023

Hildobby’s classification system for wash trades is based on four main components. A wallet has purchased the same NFT three or more times (only for NFTs using the ERC-721 token standard), the buyer and seller used the same wallet, or the wallets were both initially funded by the same wallet. He also flags trades if an NFT is repeatedly traded back and forth between multiple wallets.

The Blur representative responded to CryptoSlam’s statement by saying,

We typically like to reference analysts who have a history of doing thorough research with well-documented methodologies, rather than taking bold claims at face value. Intellectual rigor is required to develop an understanding of what’s happening so that we can improve the space.

Wasinger from CryptoSlam told Decrypt that although Hildobby’s approach for identifying wash trading was quite similar to theirs in the past, their criteria had subsequently been modified to “detect a new class of wash transactions.” In other words, it primarily focuses on sales from traders who are supplying liquidity to NFT trading pools, with little regard for the assets’ classification as collections or special assets.

Wasinger stated that “this new form of wash trading is more challenging to identify and includes a critical determination—that for a brief period, a certain wallet’s trading behavior communicates that it has no concern for the metadata of a specific collection.” We thus presume that it is trading an asset that has a comparable risk profile and is “essentially equivalent” to other assets that have previously been traded.

Mark Cuban is a supporter of CryptoSlam, which obtained a $9 million seed round in 2022 and has previously taken steps to exclude shady or falsified data from its reports. Early in 2022, the business claimed to have deleted trading data worth more than $8 billion from the startup marketplace LooksRare, which also rewarded traders with tokens.

In order to give the appearance of organic trades, dealers on LooksRare priced the NFTs at inflated values and sold them within their own controlled wallets. Nonetheless, a large portion of the activity appears to originate from NFT whales quickly moving assets back and forth within the platform’s bid pools, while there may be some coordination with Blur trades as well.

The Blur representative claimed that the startup had “been extremely careful” in creating a token incentive model that didn’t reward trades solely based on enormous amounts of NFT trading volume, and claimed that it was “fortunate enough to learn from [LooksRare’s] mistakes and focus on rewarding liquidity.”

The Blur spokesman said, “Many analysts have misread the volume on Blur and compared it to LooksRare, which is reasonable [since] the subtleties are complicated and proper research is hard to accomplish in the market.

Does wash trading exist?

While Hildobby and CryptoSlam both discuss wash trading, they don’t necessarily say the same thing. To address what many in the NFT ecosystem refer to as airdrop farming—trading massive quantities of NFTs with the apparent external motivation of increasing the quantity of reward tokens they’ll earn as a result—CryptoSlam has deliberately broadened its own criteria.

The NFT community has been engaged in a heated discussion over it lately. Several NFT designers and collectors have criticized Blur’s gamification strategies and the way flippers appear to be imposing significant market-wide changes. In an effort to adjust to Blur’s unexpected market domination, OpenSea, the industry leader for a long time, recently reduced several of its creator royalty safeguards.

Some in the industry believe it to be a logical progression for NFTs. After all, NFT traders have always been driven primarily by financial gain. Not everyone is comfortable with the thought of unique NFTs changing hands repeatedly and being traded like fungible tokens, but if it is feasible on the blockchain, traders will find a way to take advantage of the opportunity.

Wasinger acknowledged that “wash trading” might not be the most accurate term to describe what’s going on at Blur. He said that the term “inorganic trading” is more appropriate since it is more general and includes what he called “certain judgment choices in the code” outside of Hildobby’s explicitly stated technique.

Yet, everything is now listed as wash trade on the CryptoSlam website. Wasinger stated that the main objective of the action by CryptoSlam was to clear up the statistics on its platform, which indicated an abrupt increase in Ethereum NFT trading volume without any explanation of how Blur’s mechanics were affecting it. That misrepresented the market, in his opinion.

He said,

The overall amount we’re reporting today is considerably cleaner than it was previously.

From producers to competing markets and even data sources, it appears that the whole NFT industry is taking Blur’s rapid influence into account. The trading boom has confused previously trustworthy measures and made players in the market reevaluate how they view NFTs and their applications.

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