The Pixelated Party Is Over for NFTs
Last month, NFTs returned to the spotlight, seemingly regaining some of their former glory. Sales surged to $2 billion in February — numbers not seen since the Terra crash and a massive increase from the $117 million sales in January.
“We’re back baby,” rejoiced the JPEG monkey-holding diehards.
Unfortunately, the joy was short-lived. When we peel back the curtain on the data, it reveals this is no second coming for NFTs.
It’s a washout.
Naughty Fake Trades
NFTs currently have two popular marketplaces; OpenSea and Blur. For the longest time, OpenSea ruled as the number one joint for buying and selling pixelated JPEGs. But, thanks to its new aggressive incentives program, Blur recently overtook OpenSea. On Feb 14, the platform launched its BLUR loyalty token, a reward designed to encourage users to refrain from selling their collections on other platforms (like OpenSea) and — this is important — to encourage lots of selling.
Blur also decided not to enforce royalties so long as the NFTs were not sold on a competitor’s marketplace. Why? Again, to encourage lots of selling. (This is something of a turf war that’s kicked off between OpenSea and Blur, with both platforms only enforcing them if you sell your NFT between the two, rather than staying in each of their ecosystems. So much for “you’ll always get a share of the profit as the NFT continually gets flipped.” It was a nice concept while it lasted.)
Herein lies the problem. Blur is a platform for “pros,” meaning it’s aimed at those looking to flip their NFTs for profit. No diamond hands here. And with the platform now aggressively encouraging high-volume selling through its loyalty token and “optional” royalties, it resulted in a huge uptick in trading in February. The wholly predictable and should-have-seen-it-coming problem?
Most of it was wash trading.
Wash trading is driving up the price of NFTs by the buyer and seller (often the same person using different accounts). The buyer and seller sell the piece back and forth to drive up the cost but only publicly report the first sale, so other interested parties can’t…