Non-Fungible Tokens and the Threat of Wash Trading

Abstract

Non-fungible tokens are a revolutionary concept that combines art, authenticity, proof of ownership and enables large-scale commerce. Their value does not come from their use in financial transactions, but from the fact that they are linked to specific assets, whether digital or real. Non-fungible tokens thus represent a new driving force in the areas of digital ownership. Owners of these tokens can earn huge sums at a time when the art market is on the verge of revolution. The non-fungible token market experienced enormous growth in 2021 with traders investing a huge amounts of billions of dollars worth of cryptocurrencies into digital collectibles. Since 2021 the transaction activity in this area cooled, although the number of active investors continued to grow in 2022. While the popularity of certain non-fungible token collectibles can fluctuate depending on market conditions, some traders may try to manipulate the prices of certain non-fungible tokens to make them appear more valuable. The token will be sold at a higher price to a new wallet, which is also controlled by the original owner. Transactions between wallet addresses are saved on a blockchain and can be accessed publicly, so that anyone can see when the token was traded and for how much it was sold. However, wallet addresses contain no identifying information making it very difficult to discern who is behind a transaction and whether two addresses are owned by the same individual. This process is called wash trading and its analysis is a goal of this contribution.