Is this insider trading on NFTs?

The following short is an extraction from my Twitter account. Hit that Follow button!

I fully support the NFT movement. We're still in the infancy of looking at NFTs as just jpegs and odd-looking art, but it's here to stay because there is soo much more to this technology, community and blockchain enabled infrastructure. However, when I see anything that has the potential to adversely affect forward motion, it needs to be called out.

Open Sea is the largest NFT auction marketplace out there today. It is the largest peer-to-peer marketplace for cryptogoods (like an eBay for crypto assets), which include collectibles, gaming items, and other virtual goods backed by a blockchain. It has a $1.5 billion dollar valuation and recently secured $23m in a Series A and another $100m in Series B. That latter round was led by Andreessen Horowitz and has a bevy of other well-known investors.

At about midnight on September 15th, @ZuwuTV called out what appears to be some extremely dubious activities from Open Sea's Head of Product, Nate Chastain. The allegations express a troubling and officially unconfirmed pattern of acquiring NFTs before or as soon as an NFT collection publicy drops, then selling it for personal profit as it gains air time on Open Sea's home page.

On the face of it, the actions of buying an NFT, holding it then selling it is not illegal. In fact, that's common practice as it increses in value and is not any different to normal trading. The issue that has been raised is, as Head of Product, at a minimum, he is aware of what NFT collections will be on Open Sea's front page. At most, there is an argument to be made that there is the potential he may have some influence over what NFT collections get displayed on the home page.

All transactions are visible and transparent on the blockchain. That's one of the many things I love about it. @ZuwuTV and @MCM0NEY dug into the particulars of the transactions and say a pattern.

1. ETH was transferred from the main wallet.
2. That ETH was then transferred to wallet #1.
3. Wallet #1 then transferred the ETH to Wallet #2.
4. Wallet #2 acquired the NFT.
5. The NFT collection then launched on the home page of Open Sea.
6. Lots of traffic and free publicity ensues.
7. Unsuspecting buyer sees some NFTs have already been acquired and FOMO kicks in.
8. The buyer either buys more of the NFT collection or puts in a bid for the rarer NFTs already acquired by Wallet #2.
9. Wallet #2 transfers profits back to the main wallet.

No one is any the wiser and a tidy profit has been made. The main wallet transactions can be found here and other examples can be found in the thread as people have started to dig into the transaction details.

This is also not the first time Nate has been publicly called out on these actions. On August 3rd, @digitalartchick highlighted a thread where he was caught and his response was, "I just wanted to secure one of these before they all disappeared tbh"

I have been REALLY impressed by OpenSea and the distance they have travelled in a short space of time. They are doing great work and have been the one of the main champions of NFTs and empowering artists. Personally, I do not think they have been complicit in these actions. If the founders were aware and did nothing, this is a ridiculous way to risk their billion dollar business and the trust of the NFT community. If not, this is gross negligence.

Further investigations are needed to determine if this is a common practice amongst the OpenSea staff and/or their close contacts. The reality is, no one truly knows or has been scrutinising these transactions enough to determine how wide spread this is. The same level of scrutinity applied to regulated market behaviours should also be applied here because the unsuspecting buyer is losing out everytime. NFT collections that have no business trending high are being promoted because of "pump & dump" schemes. Again, this problem does not only manifest itself in the NFT/crypto space, but it is much easier to see due to the transparent nature of the transactions. These transactions were caught, but there are millions of others than go undetected.

For the moment, lets call a spade a spade. In any regulated market, this would be classified as Insider Trading. Considering the transparent nature of the blockchain, this is just brazen.

Irrespective of the official findings and statement, this highlights what we know already happens in regulated markets. There are penalties, but it's not perfect. When this happens in an unregulated market, what happens?

Slap on the wrist.

Lose your job.

Walk away with the profits.

15/09 16:25 - Update from OpenSea: Official Statement

New policies are to be put in place to prevent this from happening again. (below) I am surprised these were not in place before and just as surprised this wasn't picked up in due diligence before the Series A & B investment rounds!

• OpenSea team members may not buy or sell from collections or creators while we are featuring or promoting them (e.g. on our home page); and?
• OpenSea team members are prohibited from using confidential information to purchase or sell any NFTs, whether available on the OpenSea platform or not.