The loudest boosters for NFTs, or non-fungible tokens, say that the blockchain technology has the capacity to democratize not only the art world, but all of the decentralized digital universe. A growing body of research, though, suggests that the burgeoning market is not so much creating a new order as recreating the structures of the old one, in which a powerful few control the system and reap the rewards.
One recent study, which a team of researchers published in the leading science journal Nature, for example, found that “the top 10% of traders alone perform 85% of all transactions and trade at least once 97% of all assets.” All things considered, the top 10 percent of “buyer–seller pairs” are as active as everyone else combined. All in all, the research paints a picture of the NFT market almost completely captured by "whales," or deep-pocketed players in crypto.
“You have a very concentrated market,” Andrea Baronchelli, one of the researchers, told Motherboard.
Baronchelli, an associate math professor at City, University of London and the lead of the token economy group at the Alan Turing Institute, added that the research appears to push back against the arguments typically made that the NFT market is a democratizing and “totally open” economic system where “trade is brought to the masses.”
The team analyzed 6.1 million trades of 4.7 million NFTs using 160 separate cryptocurrencies between June 2017 and April 2021. The primary crypto currencies used were Ethereum and WAX, which bills itself as an eco-friendly alternative.
The study did have some limitations. The researchers got their data from a variety of sources, including APIs for OpenSea and Decentraland, and data from NonFungible Corporation, which tracks historical NFT sales. Because data was not directly scraped from the Ethereum or WAX blockchains, they “likely missed a number of ‘independent’ NFT producers,” according to the study. But overall, their research provides evidence that such platforms, as of now, are largely controlled by dominant whales.
Researchers for the data platform Chainalysis recently came to a similar conclusion after they found that a “very small group of highly sophisticated investors rake in most of the profits from NFT collecting.” Chainalysis took a particularly close look at the practice of allowlisting, which allows certain privileged users to buy newly-minted NFTs at lower prices, and discovered that such people earned a profit three-quarters of the time, compared to just one-fifth of the time for everyone else.
“We also see possible evidence of the use of bots by investors looking to purchase during minting events, which could shut out less sophisticated users, and even result in failed transactions that cost them in fees,” the Chainalysis researchers found.
Baronchelli’s team found that while a few NFTs have nabbed headline-grabbing prices, the industry overall appears much less astonishing. Art-related NFTs traded on average for $6,290, and pieces of metaverses typically earned $9,485. But overall, NFTs nabbed less than $15 in three-quarters of the cases, and only 1 percent of NFTs nabbed more than $1,594.
“This idea that was very big, spreading in the media—of ‘Now, we have opened up the art market. Everyone has access to directly the collectors, and therefore they can sell their stuff’—is nice, but probably not too much corresponding to reality,” Baronchelli said.
Separate analyses have suggested that the persisting dominance of a few traders could be a result of the high "gas" fees people pay to complete a transaction on Ethereum, like the supporters of the ConstitutionDAO movement recently did. This “prevents more retail traders from using” decentralized exchanges, which are markets that run directly on the Ethereum blockchain and thus incur fees, the digital assets data provider Kaiko wrote in a recent research note.
Baronchelli said that could have played a role in his team’s own analysis but that it did not wholly explain what they observed, since the WAX blockchain—which made up roughly half of the transactions they analyzed—does not charge gas fees for peer-to-peer trading.
“This corroborates that concentration may be a genuine property of the NFT market at the moment,” Baronchelli wrote in a follow-up email to Motherboard.
Another persistent concern is the prevalence of wash trading, in which a trader buys and sells a security (or, in this case, an NFT) in order to manipulate—and often inflate—the market for it. Previous research has not detected wash trading on regulated crypto markets like Coinbase, but such exchanges only made up less than 1 percent of transactions in 2019. And the practice appears more rampant on unregulated exchanges—a category that excludes the major destinations like Coinbase, Gemini, and Binance in the analysis—comprising more than 70 percent of transactions overall, according to a separate study out of Cornell. One $500 million NFT transaction on Ethereum in October, in which a trader executed a "flash loan" to sell an NFT to themselves and re-list it at a much higher price, raised such suspicions.
Though Baronchelli said his research doesn’t “prove” the existence of wash trading, the concentrated pattern they observed is “compatible” with such practices, as well as money laundering. The largely unregulated online financial market is thus potentially becoming a hotbed for the exact behaviors that governmental regulations are supposed to curb.