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Nearly 46% Of All NFT Volume In Ethereum Is Affected By Wash Trading: bitsCrunch’s Saravanan Jaichandran

SUMMARY

After explosive growth in 2021, NFT trading volume dropped by 97% between January and September 2022

The NFT ecosystem faces many challenges such as fraudulent transactions, wash trading and inefficient asset valuation, which have led to stunted growth

The market will rise again as people are making informed investment decisions, says bitsCrunch cofounder and chief data scientist Saravanan Jaichandran

Move over, Web2.0. Web3.0 and the world of digital assets are here to stay. In fact, NFTs (non-fungible tokens) took the world by storm in 2021. Trading in this blockchain-based digital asset class spiked 21,000% to $17 Bn from $82 Mn in 2020. But the market crashed equally quickly, and the volume of NFT trading plunged by nearly 97% between January and September this year.

For context, NFTs are unique digital assets that cannot be mass-produced.  NFT is a unique digital identifier on the blockchain that records the ownership of digital assets (think how digital art and music are sold by artists as NFT tokens).

Industry experts cite several reasons behind this dramatic rise and fall, but a few stand out from the rest. Like cryptocurrencies, the NFT market has been hit by shady practices like fraudulent transactions, wash trading (profits made by manipulating prices), inefficient asset valuations and more. Moreover, a crashing crypto market across the world has a direct impact on the NFT space.   

However, startups like bitsCrunch are already at work to resolve many of the issues plaguing the NFT market. The NFT-focussed blockchain analytics startup (currently headquartered in Munich) is on a mission to help investors make informed decisions by identifying the authenticity of these assets and estimating their actual value.   

The role of startups like bitsCrunch is especially critical as the NFT market requires stringent solutions to safeguard it from malpractices and legal complications. Otherwise, what started as a digital extension of pop culture, with top companies, celebrities and other creators leveraging an all-new engagement and revenue channel, could be dying an untimely death.

In an interaction with Inc42, Saravanan Jaichandran, cofounder and chief data scientist of bitsCrunch, talked about the growth drivers, challenges, regulatory roadblocks and future opportunities of the NFT asset class. Here are the edited excerpts: 

Inc42: bitsCrunch has been in the NFT business before the 2021 boom. Tell us why you chose NFT in the first place. 

Saravanan Jaichandran: It is an interesting story. All four of us (Vijay Pravin Maharajan, Ashok Varadharajan, Ajay Prashanth and I) took part in a hackathon back in 2020  and it strengthened our confidence in blockchain technology as well as cryptocurrency and NFTs as legitimate assets. 

At the time, NFTs had just started creating some buzz, but there wasn’t much talk about the gloomy side of things. But we identified the need to create a safe NFT ecosystem for its growing community early on. We also found that nearly 5.35% of all NFT transactions are affected by wash trading. Plus, our estimates show that nearly 46% of all NFT volume in ethereum is affected by washtrading.

 So, the idea of bitsCrunch took shape in 2020 to counter the dark side of NFTs.  

We began our journey with the AI-powered B2C safety feature Scour which can identify fraudulent NFT transactions manipulating the volume and price of assets.  

Our users reported a 40% fall in wash trading incidents within two months of using Scour, allowing them to make the most out of their NFT assets. Subsequently, we have introduced many solutions to safeguard buyers’ interests. 

Inc42: You said bitsCrunch uses AI tools to create a safe NFT ecosystem for trading. Tell us more about your solutions and how you empower NFT buyers. 

Saravanan Jaichandran: In spite of the surge in enthusiasts, investors, creators and collectors joining the NFT bandwagon, darkness stalks, destroying millions of dollars. What we essentially do is provide security solutions to boost safe NFT trading through blockchain analytics. We want NFT enthusiasts to make progress securely. 

As for our solutions, there is Scour that monitors NFT assets to prevent fraudulent activities. We have recently launched the Unleash NFT dashboard which provides a comprehensive overview of NFT collections and holding in real-time. 

On the B2B side, we have Liquify, which uses AI to estimate the value of the assets sold on NFT marketplaces. It considers factors like sales history, product metadata and more before determining the NFT asset’s true value. We also have a forgery detection system called Crunch DaVinci. This tool protects against unauthorised copying, counterfeits and bootlegs of NFT artworks. 

Inc42: NFT trading can be difficult for newbies due to market volatility. How does bitsCrunch help them?

Saravanan Jaichandran: Okay, let’s say one John Doe (an NFT enthusiast) gets fascinated by the buzz and wants to buy an NFT collection. How should he proceed? 

Unleash NFTs will direct him to the hottest collections with a high market cap, and he can choose an NFT collection using our key metrics and the analytics dashboard. Crunch DaVinci can figure out whether the NFT is forged or a duplicate version of an existing collection. Once the checks are done, John can evaluate the collection for wash trading. Finally, he can use the price value estimator (Liquify) to check if it is worth that amount.  

With these tools, we aim to help all our users – both beginners and advanced – make an informed decision throughout their NFT buying journey.

Inc42: In July 2022, the government announced 1% TDS on all digital assets, including cryptos and NFTs. Has it impacted NFT trading in India?

Saravanan Jaichandran: I would say so. From $17 Bn at the beginning of the year to $470 Mn in September, the 97% drop in trading volume has adversely impacted the NFT ecosystem.

But every coin has two sides. 

One set of people is elated by the TDS as it can bring legality and compliance to this space. Others believe that taxation can discourage enthusiasts from exploring the industry. Since there are no proper regulations / guidelines defined yet, that has created a stir, and the trading volume plunged.  But we’ve seen the NFT ecosystem reviving post the initial slump, with many industry experts pitching in to give a detailed explanation. 

As for bitsCrunch, we adhere to all compliance conditions and strictly follow the norms as required. We have always updated our platform for responsible changes and guided our audience on the same.

Inc42: These are tough times for the crypto industry. What is your advice to NFT enthusiasts? 

Saravanan Jaichandran: It will be prudent for investors to purchase NFTs with relatively high liquidity, which are backed by reputed developers and teams. It is especially important to pay attention to the trading volume. Even though it has been anaemic lately, a spike in volume may indicate greater investor and user interest.

Moreover, investors denominating their portfolios in native crypto assets can tolerate NFT market volatility more easily. When markets turn bullish, top collections are more likely to appreciate as they have retained their value in ETH (ether) terms.

Inc42: According to DappRadar, NFT sales have plunged by 60% in Q3 2022 compared to Q2. What has led to the decline? Will the NFT ecosystem survive the test of time? 

Saravanan Jaichandran: As they say, too much of anything is bad. The initial spike was triggered by FOMO (fear of missing out). But soon enough, people started to realise that the collections were very basic (did not contain much value) and the risk was too high. So the interest slowly fizzled out.

Shady practices have equally contributed to the sales crash. The fall of major cryptocurrencies had a direct effect on NFTs. So, investors are more careful now. 

Another reason could be NFT use cases or the lack of those. NFT expansion is (more or less) limited to digital art, leading to a dead end.  Having said that, the market will rise soon as people are learning more about NFTs and making informed investment decisions. 

Inc42: What are the latest NFT trends that can shape the ecosystem’s future? And what will be the role of bitsCrunch?

Saravanan Jaichandran: NFTs have already entered art, gaming, fundraising, smart contracts, and other domains. People are using them even for movie promotion. 

Just imagine. Starbucks is brewing more than coffee by offering digital collectables to customers. With the Starbucks Odyssey, customers can play interactive games and participate in virtual challenges, deepen their knowledge of coffee and earn an NFT for their immersive experience. 

The future is bright and long, but there are certain challenges. And bitsCrunch is always braced for it. Serving the NFT community, safeguarding the ecosystem and onboarding more enthusiasts for a secured trading experience will remain our top priority.

Note: We at Inc42 take our ethics very seriously. More information about it can be found here.

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Nearly 46% Of All NFT Volume In Ethereum Is Affected By Wash Trading: bitsCrunch’s Saravanan Jaichandran-Inc42 Media
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