One thing I don't see addressed in this article is that as far as I know, it's basically impossible to trust the reported price or volume of NFT transactions, because there's no way to distinguish fake wash trades from real ones.
So it's hard to draw any conclusions about whether the data reflects an actual peak in user activity, or just a peak in scams.
Isn't that always the case? My friend was talking about a rare Magic The Gathering card being worth a silly amount of money... Except the card had only been sold once or twice at that price.
Unless you have enough comparable items (e.g. paintings by the Dutch masters) it's really difficult to determine the value of something that's rarely sold.
Funny you should mention MtG, since the first big crypto exchange collapse was MtGox.
I always thought it was "Mt. Gox", like a mountain of sorts. Turns out it's Magic: The Gathering Online Exchange.
Edit: MtG seems like it has some kind of evergreen popularity, and various format changes, changes in the list of banned cards, reprints, and changes in the metagame will mean that prices of individual cards can vary wildly over time. So if something was sold for a ridiculous price a couple times, it's possible that something changed (Targmogoyf used to be very expensive, for example).
Wizards seems pretty good at catering to a variety of players, both collectors and non-collectors.
Not to be confused with the Berkeley Unix software company called "Mt Xinu". (The operating system's name is a recursive acronym, while the company's name is a backwards spelling.)
"We know UNIX TM backwards and forwards." -Mt Xinu
This is only half true. From Wikipedia [1], the name did originally stand for Magic The Gathering Online eXchange, but the domain was only used for that purpose for a couple months in 2007.
When it launched as a Bitcoin exchange in 2010, the unused domain was "Mt. Gox" from the beginning.
Probably similar to you, I also heard of MtGox first via crypto, and thought it was an obvious reference to Fort Knox. Only later did I realise the original meaning.
The old magic the gathering game blog had a lot of good game design topics. One of the articles talked about the 3 or 4 player archtypes they tried to design for. Worth the potential rabbit hole.
Another intersting wrinkle is that the original MtGox was created by Jed McCaleb, co-creator of eDonkey, who was later involved with the cryptocurrencies Ripple and Stellar Lumens.
- Subjective value. Neither an NFT or a trading card provides substantial, measurable utility to its owner. But, we can agree they have "value" of some kind.
- Lack of oversight. Governments doesn't have entire offices monitoring irregular sale prices for Obelisk the Tormentor or Mickey Mantle.
- Low transaction volume. If you're the only market-maker, you can set your own price.
These attributes lead me to believe that NFTs and trading cards would both very effective tools for someone trying to launder money.
You can take away any one of those attributes, and the asset would become much more difficult to use for money laundering. For NFTs, oversight seems inevitable in the next couple of years. One can only hope.
> Subjective value. Neither an NFT or a trading card provides substantial, measurable utility to its owner.
Trading cards kind of do - TCG card prices generally hinge on actual play utility as much as rarity.
Outside of really old cards that are just valuable because of their extreme rarity lots of cards that are technically rare are still only worth pennies because they aren't actually any good in the game. While cards that are no rarer or older, but are much better in play are worth tens or hundreds of dollars.
And even those cards that are mostly expensive because they're exceptionally old and hard to find, like from first print runs of games that weren't popular yet still differ in price quite heavily based on their utility in actual gameplay. Albeit mostly from the cachet that that gives them rather than from buyers desire to actually play them. e.g. Black Lotus is more valuable than other cards printed in the same quantity in the same set because it's also the most powerful card.
> Except the card had only been sold once or twice at that price.
You see this practice in art and collector car sales. It's rumored that if you see a painting go for an insane amount of money, often these sales are between "friendly" parties for the sole purpose of driving up the value of that art.
There's a big difference between an illiquid market where wealthy collectors are so keen to hang onto things they only change hands at crazy possibly-not-to-be-repeated prices and a fake market where the illusion of deep-pocketed collectors is created by the auctioneer and owner colluding to pretend an item changed hands at a massive amount of money.
It does happen a lot in physical collectible markets. It is what happened with WATA Games and the lawsuit against their employees for market manipulation through auctions. Or the Nike scandal with a VP's son using her CC and employee discount buying massive amounts of hyped sneakers and reselling them, which just made everyone more aware.
The sealed product hoarders probably have the smartest business model. Buy a bunch of sealed product as a distributor, hold it in a warehouse for 5-10 years, sell for a tidy profit when there’s just not many sealed packs left.
The sealed product command a gambler’s premium individual cards cannot, and the market has more liquidity as its way more fungible than a specific individual card. Where individual card prices are more or less an auction, sealed product actually trades like a commodity. But this commodity’s scarcity increases over time.
Of course Wizards of the Coast could print the secondary market out of existence at any time, like Pokémon TCG has done recently. But they haven’t done so for 30 years and seem to prefer to conspicuously ignore the secondary market, while obviously being aware of it.
It's important to note that price, the last traded price, and value are all distinct concepts. The last traded price is the only one of these we can measure ahead of time, so we often use it as a metanym for these other concepts. But we don't know the price of something until we make a binding offer on it and it is accepted; that doesn't necessarily mean the next transaction won't be very different, we just have heuristics about how the next price ought to look. But it's the process of negotiating a deal or bidding on an auction that defines the price, not the historical prices. If you go to a grocery store and see that milk costs $5.25, and you remember last week it costs $5.00, you don't say the price is wrong; you understand that this is the offer the store has made you, and that the price has gone up since your last visit.
When the oil futures went negative, it wasn't the case that the value of oil was negative - this was about the structure of the market and the sorts of positions people were caught in when the pandemic hit. We continued to consume oil throughout the pandemic, and so I'd say we continued to value it.
Another example would be, if a rancher has a lot of cow poop, they might pay a farmer to take it away. You could say that the cow poop has a negative price on it. But the farmer is going to make use of it as fertilizer; from the farmer's perspective, this is a commodity that has value.
It's true though that there are a million theories of value and it's impossible to say what something's value is definitively, you can only make a decision about what is value is to you.
But when wash trading is and to impact the perceived value, it does so fraudulently; it supplies information to traders - "there is a lot of interest in this security, and the (last traded) price is rising" - which is a lie. Some people will argue this too is a normal and healthy part of markets, but I don't think they've given enough thought to what sort of equilibrium that game will settle into.
Correct, not possible if you dont want someone to know
But of you’ve ever traded NFTs its hard to really begin with the assumption that trading volume is fake because bots and market makers buy from you so fast. You know that wasn't a fake or wash trade, while there is a pervasive audience of onlookers that are trying to prove a negative.
You know that funds in bankruptcy court have successfully sold $30,000,000 worth of the NFTs on their books as ordered, without issue or further controversy about where the proceeds came from
You know that DAOs have liquidated $30,000,000 worth of NFTs on their books as determined by the community, without issue
How much convincing does anyone need to move off of “its all wash trading and money laundering” to “yeah thats possible there is also lots of liquidity”, it doesn’t really make sense to make the former perception their whole identity
Right, I'm not saying there's no real trading, just that it's impossible to say how much. Which makes the graphs and anecdotes quoted in the article a bit meaningless, IMO.
I agree that the data collection possibilities are limited
this is more so for others who are looking for validation of only wash trading. I’m mostly saying some assumptions have to be made, and relative comparison to other projects and understanding actual trades occur… a lot, moves the assumptions towards more distinct market participants than assuming the nonexistence of any market participants
Please explain your comment for the rest is us. Was that a sarcastic "it really happened because it made it to the chain" or a "we'll never know whether value was exchanged from one person to another because the owner of both wallets could be the same person" - or both, neither or?
Commenter said "there's no way to distinguish fake wash trades from real ones" and I showed a case where a wash trade was, to anybody looking at it, very obviously fake.
I agree with the other part of the comment. Blockchains do not track "persons" but "wallets" and so metrics like "number of users" will not be accurate. But it is not accurate to imply that it is impossible to recognize wash trades. In many cases they are very obvious, and even can be automatically flagged. In other cases - like with CEX mixers - only the authorities can detect the fraud.
The flash loan trade was a wash trade, obviously “fake.” Other wash trades are also - very often - obvious because the blockchain is transparent and easily analizable.
How does that particular thing work? You run the exchange, then have dirty untraceable money traded on the exchange to dirty participant and you take the exchange fees? You'd have to KYC both participants, right?
Imagine you have $X million from a hack on wallet A, and you want to launder it. First, you run it through tornado cash (RIP) a few times and move them to wallets B1 to B1000. Then, you mint an "exciting NFT collection" on your public, KYC'd wallet C, list them on a "decentralized exchange", and have wallets B1 to B1000 buy those NFTs. Even better, seeing how fast your NFTs are selling out, a few suckers join in on the stampede and get mixed in alongside B1-B1000. Well, now on wallet C you have $(X - gas fees - minting fees) etc., that is totally legal and clean. You cash out on Coinbase, give the taxman his due, and you are good to go!
The Tornado Cash tumbler allows you to create sort-of-Sybils so it looks organic. The no-KYC Dex allows you to push from a no-KYC account to a KYC'd account.
The KYC'd account lets you withdraw fiat.
I see. Okay, each of the pieces are necessary. Thanks for the explanation.
> Well, now on wallet C you have $(X - gas fees - minting fees) etc., that is totally legal and clean.
It's not "legal" at all, because it's still proceeds of crime. Although it may "appear" legal and be very difficult to trace back to the source, it's still not actually legal.
Buy a “rare” NFT with clean money. Sell it a few months later for some multiple of the original price, the “buyer” is still you but using dirty money.
NB: I work in fintech but have no particular experience on the fraud / KYC / AML side of things. This is just how I imagine it would work at a high level.
Not everyone, the "participants" in the chain (typically 8-10 addresses) can arbitrarily inflate pricing by only paying fees which are trivially covered by the final trade. Once inflated, that final address can use a "mixer" to exit (for example) and essentially if KYC is performed in the conversion to fiat, it's after the mix and relatively untraceable.
Can someone tell me how to successfully do a wash trade? because I frankly have no idea.
If you fund it from your coinbase account, coinbase is going to tell the taxman about both your wallets... so no buerno. If you fund another wallet from a known wallet... the tax man can still see that. If you use Tornado cash, Coinbase is going to block it. I just don't think it's as easy as people think it is.
You can report everything to the taxman. Wash trading in this context isnt to do with taxes. Its about how you hard it is to verify claimed sale prices since you can transact with yourself.
So it's hard to draw any conclusions about whether the data reflects an actual peak in user activity, or just a peak in scams.