NFT: what is the most common type of scam and how to avoid it?

The domain of NFT dominated the year 2021 and this frenzy has continued since. As a reminder, the NFTWhere non-fungible tokensrefer to works digital made unique by associating files with a specific identifier stored in a blockchain.

Cryptokitties, Cryptopunks and Jaded Monkeys

The history of the NFTs began with the family of Cryptokitties, cats each with unique characteristics, and able to be “mated” to give birth to other equally unique Cryptokitties. This application was so successful that in December 2017 the network Ethereum was saturated for several days.

Other NFTs have seen huge success, including CryptoPunks, Bored Apes (a collection of jaded monkeys) or the works of the artist Beeple – whoseEverydays work broke a record in March 2021, following an auction at Christie’s with a purchase at 22,410.6 ETH, the equivalent of $69.3 million.

In total, the office chain analysis estimated that it had sold 44.2 billion NFTs during the year 2021. An impressive progression, compared to a total of 106 million dollars in 2020.

NFT scams

However, as might be expected, some individuals were quick to spot a source of potential fraud in such a market. Some have used NFTs for money launderingsilver. They buy a work from illegally recovered assets, resell it and then have “own money” which no longer has any relationship with theillicit activity of origin. This activity of whitening nevertheless remained in the minority.

“Wash trading” or fictitious transactions

In fact, according to what Chainalysis again reports, most of the scams to NFTs concerned an activity called “wash trading”. What does this operation consist of? To make the value of an NFT appear higher than it really is, its owner selling it to another wallet controlled by himself.

Explanation: when registering on a wallet of the Challenge (decentralized finance) such as MetaMask or Trust Wallet, it is not necessary to disclose your identity. And so, it is easy to simulate sales which, in reality, did not occur since they took place between wallets of one and the same person. Some NFT sellers have thus conducted several hundred artificial sales. Chainalysis cites the case of a seller who thus made 830 sales between addresses of wallets belonging to him. And 262 users who made at least 25 artificial sales.

An example of “wash trading”

Is it possible to spot such scams? Yes, because usually such a seller has only a limited number of wallets and, by force of circumstance, sooner or later comes to resell the NFT artificially inflated to a previously used wallet.

Here is an example of what it could look like. Suppose a seller has three wallets: one on Metamask, another on Trust Wallet, another on Coinbase Wallet.

1. Sending 0.45 ETH from a Trust Wallet wallet to the Metamask wallet;
2. Purchase of the NFT at 0.45 ETH from Metamask;
3. Sending 0.5 ETH to a Coinbase Wallet wallet from Metamask;
4. Purchase of the NFT at 0.5 ETH from the Coinbase Wallet;
5. Sending 0.6 ETH from Coinbase Wallet to Trust Wallet;
6. Purchase of the NFT at 0.6 ETH from Trust Wallet;
7. Sending 0.65 ETH from Trust Wallet to Metamask as in 1. And so on. The loop can thus be repeated several times.

Sooner or later, a buyer, attracted by this strong auction activity around the NFT, could acquire it at an artificially inflated price. If his intention was to resell it, he will end up with a work which, in reality, has no real market value.

Note that in this example we have not included the gas fees (fee for validating a transaction) and therefore the figures given here are simplified for the purposes of demonstration.

Of course, the wash trading doesn’t always work. An NFT seller who engages in such manipulations may well never sell their work in the end. In this case, said seller will incur a loss, due to the fees charged by minors at each sale. Chainalysis thus estimates that the wash trading still caused the loss of 416,984 dollars for such sellers who tried to rig the system. Scams using the wash trading however, brought in more than $8.9 million to more “lucky” sellers.

How to spot wash trading scams

It remains that it is possible to detect such an operation. So if you want to buy an NFT that has had 20 or more purchases, here’s how.

Let’s take an example with the collection of NFTs Girlies, a collection of 10,000 NFTs featuring girls’ faces. One of the buttons says: Buy on OpenSea. By clicking on it, you arrive on the page of the Girlies on OpenSea.

On the page of Girlies, on OpenSea, click on one of the images displayed below, each corresponding to a different NFT. Scroll the window down.

You will see all the transactions made on this NFT appear. Analyze the columns From and To, rising from bottom to top. In the example above (corresponding to Girly #6189), we can see that:

• this NFT was first sold by a man named Chikin to Qzoubi;
• subsequently, Qzoubi resold this NFT to kitsterKSNS;
• then, kitsterKSNS himself sold this NFT to Valentino15.

In this example, it is therefore easy to see that there was no wash trading.

Imagine, on the other hand, that Valentino15 then resold this NFT to Chikin, that Chikin again sold to Qzoubi, etc. In such a scenario, you could easily see that there would have been wash trading and therefore, it is better… to move on.