Exploiting Unfair Advantages: Investigating Opportunistic Trading in the NFT Market

ArXiv ID: 2310.06844 “View on arXiv”

Authors: Unknown

Abstract

As cryptocurrency evolved, new financial instruments, such as lending and borrowing protocols, currency exchanges, fungible and non-fungible tokens (NFT), staking and mining protocols have emerged. A financial ecosystem built on top of a blockchain is supposed to be fair and transparent for each participating actor. Yet, there are sophisticated actors who turn their domain knowledge and market inefficiencies to their strategic advantage; thus extracting value from trades not accessible to others. This situation is further exacerbated by the fact that blockchain-based markets and decentralized finance (DeFi) instruments are mostly unregulated. Though a large body of work has already studied the unfairness of different aspects of DeFi and cryptocurrency trading, the economic intricacies of non-fungible token (NFT) trades necessitate further analysis and academic scrutiny. The trading volume of NFTs has skyrocketed in recent years. A single NFT trade worth over a million US dollars, or marketplaces making billions in revenue is not uncommon nowadays. While previous research indicated the presence of wrongdoings in the NFT market, to our knowledge, we are the first to study predatory trading practices, what we call opportunistic trading, in depth. Opportunistic traders are sophisticated actors who employ automated, high-frequency NFT trading strategies, which, oftentimes, are malicious, deceptive, or, at the very least, unfair. Such attackers weaponize their advanced technical knowledge and superior understanding of DeFi protocols to disrupt trades of unsuspecting users, and collect profits from economic situations that are inaccessible to ordinary users, in a “supposedly” fair market. In this paper, we explore three such broad classes of opportunistic strategies aiming to realize three distinct trading objectives, viz., acquire, instant profit generation, and loss minimization.

Keywords: Decentralized Finance (DeFi), Non-fungible tokens (NFT), Opportunistic trading, Blockchain, High-frequency trading, Crypto / NFTs

Complexity vs Empirical Score

  • Math Complexity: 2.5/10
  • Empirical Rigor: 6.0/10
  • Quadrant: Street Traders
  • Why: The paper relies primarily on conceptual analysis of blockchain mechanics and opportunistic strategies, with minimal advanced mathematical derivations. However, it is highly data/implementation-heavy, involving the collection and analysis of real NFT market data, categorization of trading strategies, and plans to release code, making it practical and backtest-ready.
  flowchart TD
    A["Research Goal"] --> B["Identify Opportunistic Trading Strategies"]
    B --> C["Analyze Blockchain Transaction Data"]
    C --> D["Heuristic Analysis & Pattern Detection"]
    D --> E["Classify Strategies: Acquire, Profit, Loss Minimization"]
    E --> F["Key Findings"]
    subgraph F["Outcomes"]
        F1["Quantified predatory behavior"]
        F2["Economic impact on users"]
        F3["Market inefficiencies exploited"]
    end