Why is it urgent for NFT trading platforms to curb wash trading?

Authors: Helena L., Sun L., Eocene Research

We analyzed the current state of wash trading in NFTs (especially trading mining) and conducted in-depth research into the strategies behind the main wash traders and their profits and losses. At the same time, we share a model in this article that increases the probability of earning profits and reduces the risk of losses, demonstrating how the current trading mining reward mechanism can be easily manipulated for arbitrage. Finally, we put forward several viewpoints, emphasizing how wash trading is seriously affecting the survival of these NFT trading platforms themselves.

After a long crypto winter in 2022, the NFT track finally regained new life in 2023 after a sustained period of depression. Since January, the trading volume of the entire NFT market has been growing, with weekly trading volume soaring to $11.5 million, a level not seen since the crypto bear market triggered by Terra’s collapse. Although trading volume has declined due to the collapse of Silvergate and SVB and the squeeze of funds into memecoins, the NFT market still outperforms the fourth quarter of last year and the outlook remains bullish.

But for those who have long profited from the industry’s lack of regulation, the future is not optimistic.

NFT weekly trading volume

The most notorious behavior in the NFT market is undoubtedly wash trading. Wash trading is sometimes used to create a false illusion of value for a specific NFT, and other times it is often used as a strategy by users for trading mining, such as X2Y2 and LooksRare, which reward users based on their trading volume. Most of the wash trading marked on most on-chain data platforms belong to the latter, while the former is usually larger scale, more organized market manipulation, and more difficult to identify.

Compared with market manipulation, using wash trading to obtain token rewards may sound more “harmless,” but this behavior is actually unreasonable and illegal. In traditional finance, wash trading is strictly defined as illegal behavior, but it has been growing wildly in the NFT world. However, as the position of the crypto industry becomes more and more important globally, governments and regulatory agencies will definitely intervene. We have all witnessed the rapid strengthening of industry regulation since 2022, so soon, the NFT market will inevitably be subject to stricter regulation, and wash trading, as one of the most obvious problems, will be the first to bear the brunt.

Who is the biggest wash trading player?

On average, wash trading accounts for about a quarter of all NFT trades in a given day. Almost all of the wash trading happens on X2Y2 and LooksRare¹.

[1] Since the launch of the BLUR token and the appearance of Season 3 rewards in March 2023, wash trading volume on Blur has skyrocketed. While this is also related to trading mining, Blur’s reward mechanism has significant differences from X2Y2 and LooksRare; wash trading on Blur is more the “unfortunate” result of user adventurous behavior than intentional behavior. The debate about whether this kind of trading should be considered wash trading has been ongoing. In this article, we will focus on intentional wash trading, which is dominated by X2Y2 and LooksRare.

Proportion of real and wash trades

Interestingly, 4 address pairs (a total of 8) account for almost 80% of the wash trading volume in the market. We have delved into the strategies of these 8 wallets and calculated their earnings² from trading mining.

[2] There are two sources of rewards on X2Y2: trading mining and staking mining, with staking mining allocating the transaction fees earned by the platform to users holding staked tokens. Some users have been staking to compensate for some of the costs of wash trading. However, overall, if the PnL generated by wash trading is negative, the best choice for users is to stop wash trading altogether. From this perspective, trading mining and staking mining are relatively independent.

Addresses involved in the largest amount of wash trading

These four pairs of wallets have adopted the same strategy—repeatedly trading the same NFT between two wallets, with each trade priced at hundreds of ETH (far above the floor price):

  • Address pair A trades More Loot #666688 on X2Y2;

  • Address pair B trades mpunk #11755 on LooksRare;

  • Address pair C trades Dreadfulz #164 on X2Y2;

  • Address pair D trades More Loot #1022020 on LooksRare.

About 90% of the trading volume in all transactions on X2Y2 and LooksRare comes from these four wallet pairs (excluding private transactions):

These eight addresses account for about 90% of the trading volume on X2Y2 and LooksRare.

Some interesting findings:

  • Address pairs A and B are actually controlled by the same entity, indicating that this group of market-washing traders that seriously affects the market is highly concentrated.

  • All NFTs used for washing are zero royalty. This also indirectly proves the importance of royalties. Royalties can not only fairly distribute value to creators, but also prevent bad trading behavior, thereby maintaining the healthy development of NFTs.

How much profit do market-washing traders make?

We calculated the profits obtained by these four address pairs from washing transactions between November 1, 2022 and April 6, 2023, with X2Y2 or LOOKS token rewards as income (the rewards of both platforms are mainly allocated to sellers), and platform fees and gas fees as costs.

PnL = Trade rewards – Platform fees – Gas fees

Trade rewards

  • X2Y2: Starting from October 5, 2022, a daily reward of 400,000 X2Y2 tokens is awarded, of which 95% is distributed to sellers based on transaction fees, and the remaining 5% is distributed to buyers.

  • LooksRare: Between May 12, 2022 and January 3, 2023, a daily reward of 437,458 LOOKS tokens is awarded. After January 3, 2023, a daily reward of 236,650 LOOKS tokens is awarded. Starting from October 28, 2022, 95% of the reward is distributed to sellers, and 5% is distributed to buyers (evenly distributed before this date)

Platform fees

  • X2Y2: Fixed at 0.5%

  • LooksRare: Starting from October 27, 2022, the transaction fee for all NFTs that choose not to charge royalties is 1.5% (the NFT transaction fee is reduced to 0.5% from April 6, 2023)

Overall, 4 pairs of addresses obtained positive gains from wash trading, among which the pair B received particularly substantial profits.

Traders made profits through wash trading.

A specific example of a wash trading operation

Below is a step-by-step demonstration of how address pairs A and B carried out wash trading. The funds for these two pairs of addresses both came from 0x E 265 3d 08 d 70 cF 47 BCe 18 E 3471 bAB 8 ee 6 AA 1 E 6 EE 2

  1. 0x E 265 first borrowed ETH from Aave.

2. Then, 0x E 265 will send the borrowed ETH to any of the four addresses.

3. After obtaining the funds, these addresses will begin wash trading on X2Y2 and LooksRare at extremely high prices, using the left hand to swap with the right hand.

4. After the trades are completed, these addresses will send the ETH back to 0x E 265, who will then repay the loan from Aave.

5. These two trading markets will settle the trading rewards at the end of each day. After receiving the rewards, these addresses will exchange the reward tokens for ETH,

or they may choose to pledge some of the rewards to the fee-sharing contract to earn transaction fees and more token rewards.

At first glance, this process seems reasonable, but there are many confusing aspects to it. First of all, how do these wash traders determine the trading price? Although the higher the trading price, the more rewards they may receive, why trade at a price of 400 ETH instead of 200 or 1000? Secondly, the timing of these trades is also confusing. Why not choose to trade when the rewards are settled every day, in order to better estimate the trading volume level that can yield more profits?

Trading strategies and game theory between wash traders

Profiting is not as easy as it seems. More trading volume doesn’t always mean higher rewards. In fact, once the total daily trading volume in a market exceeds a certain threshold, every trader on that day will lose money. Given such a threshold, entering the market earlier in the day is actually advantageous, as it prevents other traders who also want to profit from the trading rewards (assuming they have the same experience as you).

1) Calculating the profit threshold

For example, the profit threshold on X2Y2 on March 9, 2023 is: (380,000 * 0.0617) / (1,438 * 0.5%) = 3,262 ETH

This threshold fluctuates daily with the reward token and ETH prices. But the key here is that as long as the total trading volume for the day in that trading market is lower than this threshold (excluding private trades), every trader can profit from mining rewards on that day. That means the income from trading rewards will surpass the cost of trading fees.

Therefore, it’s not surprising that traders would enter the market earlier in the day rather than later — whoever enters first has more room to manipulate the trading volume and rewards. On the other hand, traders who enter the market near the end of the day have a small trading space left to obtain reward tokens, because they cannot push the total trading volume beyond the profit threshold level. Of course, many traders may not be so savvy, nor do they understand this mechanism. There are also traders who are truly concerned with actual NFT trading rather than token reward income. These are factors that wash traders cannot control, but entering the market earlier still gives them an advantage.

2) Estimating the total daily trading volume of the platform

Next, it will be necessary to estimate how likely it is that the total trading volume for the day in the market (excluding private trades) is below the profit threshold. Taking X2Y2 as an example, we find a strong linear correlation between the total trading volume and the reward token price.

Platform trading volume compared to reward token price trend

There is a strong linear correlation between trading volume and reward token price

The trading volume of the day can be estimated based on the current token price:

For example, on March 9, 2023, the estimated total trading volume is: 43,617 * 0.0617 + 499.63 = 3,191 ETH

If this number is smaller than the profit threshold, traders can confidently participate in the day’s trading and make a profit.

3) Determine the trading amount based on the target profit

The maximum profit can be calculated as:

For example, on March 9, 2023, the maximum profit is: 380,000 * 0.0617 / 1,438 – 0.5% * 3,191 = 0.35 ETH

If the trader wants to make a profit of 0.1 ETH, which is 29% of the maximum profit, the trading price should be set at:

For example, 29% * 3,191 = 925 ETH

Traders can achieve this goal in one transaction or in multiple transactions, but multiple transactions also mean paying more gas fees.

Of course, the larger the trading volume, the more rewards that may be obtained. However, this also comes with more risks. As mentioned earlier, there are some uncontrollable factors, such as those not-so-smart wash traders and those who may not be aware of or care about the true traders who exceed the profit threshold. If this situation occurs, the larger the trading volume, the greater the losses borne by the wash.

Nevertheless, there are very few real transactions on X2Y2 and LooksRare (we will explain later why these two platforms lack real transactions). Even not-so-smart wash traders will realize that their strategy is not working after losing money consistently. The above analysis is sufficient to prove that the trading mining reward system of these two platforms can be easily manipulated and arbitrage by some simple mathematical calculations.

NFT trading market laissez-faire washing pan trading rampant, putting itself in a predicament

In discussions about NFT washing pan trading, X2Y2 and LooksRare often become the focus of attention, but they have yet to take any strong action to address the issue. An obvious reason is that washing pan trading brings them actual revenue, which seems to outweigh the cost of negative reputation caused by rampant washing pan trading.

However, we firmly believe that washing pan trading has not only a negative impact on the reputation of these platforms, but also poses a serious threat to the development and even survival of these trading platforms:

Unable to attract professional trading whales

Professional traders who want to conduct large-scale transactions on X2Y2 and LooksRare do not benefit from token rewards, as false trading volume brought by washing pan traders can easily push total trading volume beyond the profit threshold. In contrast, these traders can trade on other NFT markets such as Blur without paying any transaction fees while receiving reward points.

Stagnant trading volume

On the one hand, real traders have no incentive to trade on these platforms, and on the other hand, the reward system has a game (once the trading volume exceeds a certain threshold, the reward is meaningless compared to the transaction fee). These two factors combined become a huge obstacle to the upward trend of platform trading volume.

Reward token prices are easily manipulated

Most reward tokens are only allocated to a few addresses that are good at washing pan trading. The high concentration of token holdings means that the prices of these tokens are easily influenced by the behavior of these few addresses. If these addresses sell a large number of reward tokens, the token price will quickly drop.


The inaction of NFT trading platforms in the face of washing pan trading stems from the dilemma they face: the transaction fees of washing pan traders bring them considerable revenue, and if they immediately eliminate washing pan trading, they cannot guarantee that they can earn the same amount of revenue.

However, these platforms are also putting themselves in a very dangerous position — the vast majority of their transaction volume comes from just a few wash traders. If these traders suddenly stop trading on these platforms, for example because the value of reward tokens is no longer attractive, or when regulators intervene to curb wash trading (which is only a matter of time), most of their trading volume will evaporate in an instant, and since they have not stopped wash trading and failed to attract real users, it will be too late to remedy the situation.

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