Fake Trading, Stablecoin Troubles, and the Threat of Crypto Regulation: Our Crypto DeFined NFT Roundtable Takeaways

Fake Trading, Stablecoin Troubles, and the Threat of Crypto Regulation: Our Crypto DeFined NFT Roundtable Takeaways

Despite slowing sales this year, digital assets remain one of the most closely watched areas of the crypto industry.

Sales of NFTs, or non-fungible tokens — which are unique digital art, music or even tweets — slipped 4.6% in the first quarter of 2022 to $7.9 billion from $8.3 billion in the prior quarter, according to data provider NonFungible.com. Still, sales are on track to hit between $30 billion to $40 billion in 2022, according to various estimates.

On TruthDAO's "Crypto DeFined" interview show — available exclusively on Fireside — we spoke with four academics about the state of the NFT market, how fake trading affects investor demand, and how the troubles unfurling in the stablecoin market could stoke demand for regulation of the overall crypto industry.

Here are three key takeaways that emerged from the May 12 roundtable:

The NFT market is not very decentralized. Despite the crypto industry embracing an ethos of decentralization, the NFT market belies this notion: Trading and ownership in this space tends to be centralized among a small number of participants.

“In social systems, there are players who guide the market,” said Matthieu Nadini, a data scientist in the crypto industry and one of the lead authors of research on NFTs published last year. “Here, we are supposed to be talking about something very different, the decentralized blockchain, but in reality, as of today, we can't really find … much decentralization.

Nadini’s research, published in Scientific Reports, showed that the top 10% of traders handled 97% of all NFTs at least once and accounted for 85% of the six million-plus NFT trades between June 2017 and April 2021. Three out of every four NFTs sold for less than $15 apiece while 1% of NFTs sold for more than $1,594, his research showed.

Wash trading in NFTs has become more sophisticated. Fake trades are no longer only about two wallets trading back and forth between each other to boost volume and attract investors, according to two academics from the University of California at Santa Barbara.

Wash trades are becoming harder to detect because traders may disguise their activity among many different wallets, according to Priyanka Bose, a doctoral candidate at UCSB, and figuring out what is fake often requires monitoring the marketplace as well as the blockchain.

NFT collection owners may also wash trade until their digital asset starts gaining attention, and then stop when there is legitimate interest from buyers in the marketplace, says Dipanjan Das, also a doctoral candidate at UCSB.

In an examination last year of seven NFT platforms, Bose and Das found wash trading in 29% of NFT collections with more than $2,000 in trading volume. Das said the findings underscore the need for anti-money-laundering policies that give platforms more information on their customers.

At the moment, “any random dude can create a crypto wallet, have coins in it and start trading,” he said. “That’s not optimal.”

Regulation of the crypto world could curb market abuses. Turmoil in one corner of the crypto industry, stablecoins — which are supposed to be the least volatile because they are designed to maintain a constant value — are a “wake-up call” that other parts of the crypto industry could also be vulnerable, according to Sangita Gazi, a doctoral student at the University of Hong Kong.

“Without regulatory protections, the (crypto) market will go down and this market will be volatile,” said Gazi, who authored a paper looking at how cryptocurrencies are regulated in different parts of the world. “At the end of the day, people will be skeptical about investing in cryptocurrencies.”