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The Fast-Growing NFT Market on Ethereum Is Problematic Yet Promising

In some circumstances, is yield farming with non-fungible tokens (NFTs) another term for wash trading?

Yield farming is the process of getting tokens in return for providing crypto assets to fledgling marketplaces. The activity surged this summer starting with decentralized finance (DeFi) money markets like Compound. But now the game has migrated to other markets as well. Just like players at arcades, yield farmers put in money and get tokens in return. Then they use those tokens to play video games, hoping to win a prize by beating the game.

In the NFT space, this dynamic is being pioneered by Rarible, where users are rewarded with rari tokens for buying and selling digital collectibles. Rari token rewards propelled the site to quickly overtake other NFT marketplaces. However, this dynamic also created a fresh set of problems related to wash trading. Traders often swap these reward tokens for money on platforms like Uniswap. 

With more than 33,189 transactions tallying roughly $3.6 million in trading over the past month, according to NonFungible.com, there’s such a small market for crypto collectibles that wash trading can sometimes be difficult to identify. 

Michael Arnold, an engineer at crypto gaming startup My Crypto Heroes, said it’s important to distinguish between the different types of NFT wash trading. In short, wash trading traditionally means someone putting “buy” and “sell” orders at the same time, to create the illusion of demand. Sometimes people can wash trade while yield farming, but these aren’t usually the same thing. 

“Some developers have been spotted that did wash trading at the start. But I’d say it’s rare. Some users also did wash trading, which might be more common,” Arnold said. “But it really depends on the incentives. If you’re a whale in a game, you want to do wash trading to see your game high in the OpenSea ranks. If you’re trading on Rarible, you want to collect the governance tokens.”

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