How to Prevent NFT Wash Trading?

NFT wash trading is one of the biggest problems in the digital asset world right now. In simple terms, it happens when a person or group trades an NFT back and forth between wallets they control, making it look like the asset is popular and valuable when it is not. This fake activity tricks other buyers into thinking an NFT is worth far more than it actually is.

This is not a small issue. Research from Wharton and UCLA found that around 38% of trades and up to 60% of traded value across major NFT exchanges likely involve manipulation. Approximately $30 billion in NFT volume on Ethereum has been linked to wash trading, according to Dune Analytics data. These numbers make it clear that NFT marketplace security is something every platform, trader, and NFT marketplace development company needs to take seriously to maintain trust, transparency, and long-term market growth.

This blog covers what wash trading is, how it works, why it happens, and most importantly, what practical steps can be taken to prevent it. Whether you run an NFT platform or are a buyer trying to protect yourself, this guide has everything you need to know.

What Is NFT Wash Trading and Why Does It Happen?

Wash trading, in the traditional financial world, is illegal. Under the U.S. Commodity Exchange Act of 1936, it is explicitly banned because it gives false signals about market activity. But in the NFT space, regulation has not fully caught up, which has allowed this practice to spread widely.

Here is how it typically works: a wash trader creates several crypto wallets, funds them from a shared source, and then buys their own NFT at a higher and higher price each time. This inflates the NFT’s sale history and makes it look like demand is growing. Other buyers see the activity and assume the asset is valuable, which can lead them to pay far more than they should.

1. Common Patterns Behind Wash Trading

Researchers and on-chain analytics firms have identified several tell-tale patterns that wash traders follow:

• Self-Trades: The same user trades an NFT between two wallets they personally control.
• Back-and-Forth Trades: Wallet A sells to Wallet B, then Wallet B sells it right back to Wallet A shortly after.
• Circular Trades: An NFT passes through three or more wallets in a loop, eventually returning to the original owner.
• Common Funding Source: Both the “buyer” and “seller” wallets were funded by the exact same originating wallet.

2. Why Traders Do This

People wash trade for a few different reasons. The most obvious is to inflate an NFT’s apparent value before selling it to an unsuspecting buyer at a large profit. But there are other reasons too. Some platforms offered token rewards based on trading volume, which meant wash traders could generate large volumes and collect those token rewards. When LooksRare launched in January 2022 with LOOKS token rewards tied to trading activity, it directly incentivized this behaviour. The result was that roughly 95% of LooksRare’s $18 billion in total volume turned out to be wash trading. Similarly, when Blur launched its $BLUR token airdrop in February 2023, NFT wash trading across all platforms spiked by 126% in a single month.

Some wash traders also use NFTs to launder money, moving illicit funds through the appearance of legitimate transactions on a public blockchain.

NFT Wash Trading: Platform Comparison

Sources: Cointelegraph, Financial Innovation Journal (Springer), CoinDesk / Dune Analytics

How NFT Fraud Prevention Starts With Better Detection

Before you can stop wash trading, you need to be able to find it. Detection has improved significantly in recent years, mostly because all blockchain transactions are publicly recorded. This transparency, while it helps wash traders create visible fake volume, also means that investigators can trace every transaction after the fact.

1. Blockchain Analytics Tools

Chainalysis is one of the most widely used blockchain forensics tools, employed by 85% of U.S. law enforcement agencies. Its analysis has already identified $2.57 billion in suspected wash trading. For NFTs specifically, it tracks sales to self-financed addresses to flag habitual wash traders. The Chainalysis Reactor tool lets investigators actually see the circular fund flows visually, which makes it easier to build a case. Dune Analytics also provides open-source dashboards that cover 29 or more major NFT marketplaces, tracking wash trading activity both in real time and historically.

2. Machine Learning Models

Researchers at Wharton, University of Pennsylvania, and UCLA built a machine-learning system trained on 16 on-chain behavioural fingerprints. These include things like how quickly an NFT is flipped after purchase, how much the sale price deviates from previous trades, and how active the wallets involved are over time. This approach reduced estimation errors to below 1.3%, proving that AI tools can flag wash trading with a high degree of accuracy. The same framework was even able to successfully identify wash trading in older Bitcoin data, showing its usefulness beyond just NFTs.

3. Heuristic Algorithms

AnChain.AI developed an algorithm that flags a transaction as a wash trade when a wallet buys back an NFT within 30 days of having sold it. The algorithm also traces intermediate transactions that happen within a wash trade cycle. Testing across popular NFT collections such as Bored Ape Yacht Club, Azuki, and Doodles showed that, on average, 0.14% of transactions, 0.11% of wallets, and 0.16% of tokens in each collection were linked to wash trading behaviour.

Key Steps to Prevent NFT Wash Trading on Your Platform

Now that we understand how detection works, here are the most practical and proven steps that NFT marketplace operators can take to stop wash trading before it happens.

1. Implement KYC and Identity Verification

Know Your Customer (KYC) processes are among the most direct tools available for NFT fraud prevention. When users have to verify their identity with a government-issued ID or passport before trading, it becomes much harder to operate dozens of anonymous wallets for wash trading. NFT platforms in Europe and the UK are already expected to align with Anti-Money Laundering (AML) frameworks, which include KYC requirements. The Financial Action Task Force (FATF) clarified in October 2021 that NFT marketplaces may fall under virtual asset service provider (VASP) rules, making KYC compliance potentially mandatory.

Platforms should also request proof of address for higher-risk users and conduct Enhanced Due Diligence (EDD) for accounts showing unusual transaction patterns. PEP (Politically Exposed Person) screening is another layer that helps keep high-risk individuals off platforms.

2. Set Up Transaction Monitoring Systems

Continuous monitoring of on-chain activity is essential. Platforms should flag and investigate transactions that show rapid price jumps, repeated wallet interactions, or patterns where the buyer and seller share a funding source. A Suspicious Activity Report (SAR) system allows platforms to formally report anything that looks like manipulation to the relevant regulatory authority. In the U.S., the 2024 Treasury Illicit Finance Risk Assessment on NFTs specifically pointed to weak transaction monitoring as a gap that needs to be addressed across the industry.

3. Remove Volume-Based Reward Structures

This is one of the most important changes any NFT platform can make. The data is very clear: when a marketplace pays users tokens based on how much volume they generate, wash trading explodes. LooksRare went from being a legitimate competitor to OpenSea to having nearly all its volume classified as fake, purely because of its reward structure. Any platform that incentivizes volume over genuine trades is essentially paying wash traders to inflate its numbers. Reward structures should instead be based on engagement quality, collector history, or creator activity rather than raw trading volume.

4. Conduct Smart Contract Audits

NFT marketplace security also depends heavily on how well-written and audited the underlying smart contracts are. Vulnerabilities in smart contracts can be exploited not just for wash trading but for outright theft. A third-party audit from a reputable blockchain security firm should be done before any marketplace goes live, and periodically after major updates. Smart contracts should be built to enforce fair trading conditions, restrict the same wallet from repeatedly appearing on both sides of a transaction, and log all data permanently for future review.

5. Use On-Chain Wallet Scoring

Assigning a risk score to wallets based on their transaction history is a growing practice in NFT marketplace security. Wallets that have previously been involved in circular trades, that were funded from a single suspicious source, or that have been flagged by Chainalysis or similar tools should be restricted from trading or pushed through extra verification steps. This kind of dynamic risk scoring makes it harder for bad actors to simply create new wallets and start over.

6. Enforce Cooling-Off Periods

A very simple but effective technical control is to prevent the same NFT from being resold too quickly after purchase. If a platform blocks resale for 24 to 48 hours or flags NFTs that are flipped multiple times within a short window, it makes wash trading cycles far harder to execute. The AnChain.AI algorithm mentioned earlier uses a 30-day window to flag repurchases. Platforms can adopt similar logic natively within their smart contract rules.

7. Display Wash Trading Warnings to Buyers

Transparency helps buyers protect themselves. If a platform surfaces data about unusual price activity, shows buyers how many times an NFT has changed hands in a short period, or displays an alert when a wallet’s funding source matches the counterparty’s, buyers can make more informed decisions. Some platforms already display provenance and transaction history, but adding automated risk flags on NFT listing pages would be a meaningful improvement for buyer protection.

NFT Wash Trading Prevention

The Role of Regulation in NFT Marketplace Security

Regulation is catching up, even if slowly. The U.S. Treasury’s 2024 Illicit Finance Risk Assessment on NFTs was the first federal report dedicated entirely to money laundering risks in the NFT space. It pointed to gaps in AML controls, poor sanctions screening, and insufficient cybersecurity measures across several platforms.

In Europe, NFT platforms are increasingly being treated the same as other virtual asset service providers under local AML laws. This means implementing risk-based KYC, transaction monitoring, and sanctions screening. FATF, whose recommendations have been adopted into law by over 90% of jurisdictions worldwide, has made clear that NFT marketplaces could be subject to the same regulatory expectations as crypto exchanges if they facilitate large-value transfers.

The U.S. Commodity Exchange Act has explicitly prohibited wash trading in traditional financial markets since 1936, but enforcement in crypto has been limited. That is gradually changing as regulators build more expertise in blockchain forensics. Platforms that proactively align with these frameworks will be in a much stronger position when stricter rules arrive.

1. What Platforms Can Do Right Now

• Build an AML compliance programme with a designated compliance officer, documented internal policies, and regular third-party audits.
• Introduce Suspicious Activity Reporting (SAR) processes and train staff to identify and escalate red flags.
• Work with law enforcement and blockchain forensics firms when suspicious patterns are detected, rather than ignoring the problem.
• Maintain full records of all transactions in a way that can be provided to regulators upon request.

Real-World NFT Security and Blockchain Implementations

The following projects show how blockchain development principles discussed in this article, including smart contract security, on-chain transparency, and community-driven governance, are being applied in real platforms built by Nadcab Labs.

How Buyers Can Protect Themselves From NFT Wash Trading

While it is largely the responsibility of platforms to address wash trading at a structural level, buyers also have tools available to protect themselves. Being an informed buyer is the first line of defence.

1. Check Transaction History Before Buying

Before purchasing any NFT, look at its full sales history on the blockchain. If an NFT has been bought and sold many times in a short period, often between a small number of wallets, that is a strong warning sign. Tools like Etherscan allow anyone to look up a specific NFT’s transfer history for free. If the price has jumped sharply without any obvious external reason, treat it with caution.

2. Use Platforms With Transparency and Monitoring

Choose NFT marketplaces that have clear security policies, publish information about their fraud prevention practices, and have undergone third-party smart contract audits. Platforms that operate anonymously or have no published AML practices carry a higher risk of harbouring wash trading.

3. Be Careful With Platforms Offering Aggressive Rewards

As the data from LooksRare and X2Y2 showed clearly, platforms that offer large token rewards for trading are more likely to have inflated volumes. Before trusting the trading history on such a platform, consider that much of that volume may not reflect real buyer demand. Cross-reference with data from Dune Analytics or DappRadar to get a more honest picture.

Conclusion

NFT wash trading is a real problem that has cost the industry billions in credibility and has misled countless buyers into paying inflated prices. The scale of the issue is significant. With up to 45% of Ethereum NFT volume linked to wash trading and individual platforms recording fake volumes as high as 95%, it is clear that the problem cannot be ignored or left to fix itself.

The good news is that the tools and methods to prevent NFT wash trading are already available. Blockchain analytics, machine learning models, KYC verification, smart contract audits, wallet risk scoring, and the removal of volume-based reward incentives all form a strong combined defence. Regulation is also moving in the right direction, with the U.S. Treasury, FATF, and European regulators all signalling that NFT platforms will face the same expectations as other financial service providers.

For platform builders, the clearest lesson is this: design for genuine user behaviour from the start. Do not create reward systems that pay traders for volume. Built-in monitoring. Get your contracts audited. Verify your users. The NFT market has enormous potential across art, gaming, real estate, ticketing, and beyond. That potential will only be realized if the market is clean and trustworthy. NFT marketplace security is not an afterthought. It is the foundation on which everything else is built.