As part of today’s coffee house discussion hosted by @jringo it came to my attention that an implication can be drawn from the conclusions of the paper that is simply too big to ignore.
A very interesting point was that the final percentage of wash-trading (~2% of total Txs) seems suspiciously low given people’s experience around NFT project communities and the overall permissionless and trustless nature of web3 with the motto “Don’t Trust, Verify”. There seems to be a suspicion about the final numbers which goes against the common narratives, journalistic work, and first-hand experiences of web3 participants. It is very interesting to investigate this sentiment because it hints at the fact that the conclusions of this paper might be critical for howe we think about the social dimension of web3.
Interpreting the results
The conclusions lead to the following possibilities:
- False negative: The number of wash-trading is misleading and is an artifact of a methodological fluke in the heuristics used for representing wash-trading (or other methodological parameters).
- Folk-psychological bias: The number of wash-trading represents the underlying reality and the discrepancy is due to erroneous prior intuitions and underlying assumptions about human behavior on web3.
False Negatives and Methodological Hurdles
If 1 is the case, (as the authors are careful to point out as a possibility) it means that additional studies are needed to form clear hypotheses based on the statements and conclusions of the current paper and find where the contention lies. The most obvious culprit is that the heuristics used such as closed loops and high transaction frequency might be either too constraining or not suitable. There is no reasoning in this paper as to why these two heuristics were chosen in the first place although it seems that the quantified representation originates from (Das et al, 2021). But as mentioned in that original literature, they were the first to construct a quantified model of malicious behavior in the context of NFTs and not enough research exists on the specific ways in which wash-trading actually takes place in this context. I would like to ask @f13r whether they know if any of the quantitative work is based on ethnographic analyses on how this behavior actually takes place and if such ethnographic studies have been specifically conducted on some of the communities behind the NFT projects and marketplaces chosen for the current study. If not, then that presents a very important methodological hurdle because the current methods of quantification might be failing to account for real behavior in NFT communities. NFT communities in the context of degen culture have unique coalition dynamics and collusion patterns and probably engage in wash-trading in ways that have not previously been considered. For example, there is no clear explanation as to why round-trip trades modeled as closed-loop graphs might be a suitable heuristic for identifying wash trades in NFT communities. If @f13r or any of the original authors would provide more in-depth reasoning, as to why this is it would be much appreciated.
Folk-psychological Bias, Bad Faith and Views of Human Nature
If 2 is indeed the case, then this hints at a very interesting sociological implication. On the one hand, the default stance in web3 seems to be that fraudulent behavior is expected and doesn’t constitute that big of a problem since culturally, a lot of strain is placed on individual responsibility in terms of security, vigilance and risk. The default stance in terms of the question of human nature and behavior in a social setting seems to be one of acceptance of greed and opportunism. The design of blockchain validation systems in PoW systems that use greed and personal profit as incentives to maintain the integrity and truthfulness of transactions seems to presuppose such an underlying philosophical presupposition.
Tactically building systems that utilize the bad faith and opportunism of users for producing outcomes that serve a greater good (from securing a network to reducing carbon footprint) is the underlying presupposition that also informs a great deal of innovation in Ethereum and other blockchains with smart contract functionality (Cosmos, Celo etc.). But if the conclusion of the paper is legitimate, it means that the pessimistic intuitions about human nature that inform the game-theoretic design of the infrastructure of web3 are based on a wrong assumption. This is big and cannot be overstated.
It seems that because of the way bad faith behavior seems to occupy the forefront of the space’s attention and because of the inherent cognitive bias to overestimate the negative consequences of certain actions, our underlying perception of how humans act in the anarchic and permissionless environment of web3 is clouded.
The possibility that such an interpretation of the conclusions is even possible means that the study cannot stop here. Having been trained in the history of science, simple implications such as this are often enough to append whole established ways of thinking and follow-up research will be needed to address the issues raised. The original researchers such as @f13r will need to address the possibility of methodological errors or replicate given an updated data set including additional sources and heuristics and if no statistically important discrepancy is observed then a follow-up to address the philosophical issues of morality and design based on the empirical evidence collected would be important.