OpenSea product chief accused of flipping NFTs with insider information

https://www.theverge.com/2021/9/15/22676075/opensea-insider-information-nft-trading-nate-chastain

by jbegley • 5 years ago

130 73 5 years ago

bko• 5 years ago

This transparency has historically allowed users to protect the community by uncovering elaborate scams, such as when “cybersleuth” Fedor Linnik discovered that the team behind a million-dollar “female-led” project was actually Russian men.

This made my chuckle. The article that it links to was aptly titled "This $1.5 million ‘women-led’ NFT project was actually run by Russian dudes" [0]

Since so much is driven by identity, is there a service where you can rent out front people to "lead" the team that check the right boxes? Kind of like the those ghost board members that sit on thousands of board of directors on Cayman Islands shell corps and just do what management says?

[0] https://www.inputmag.com/culture/fame-lady-squad-nft-women-m...

rchaud• 5 years ago

Since so much is driven by identity, is there a service where you can rent out front people to "lead" the team that check the right boxes?

Like much of modern crypto-centric products, this is a solution in search of a problem. People are accustomed to going in headfirst without knowing who is behind these projects. It's 'decentralized' and features 'smart contracts' for 'trustless commerce'. What more do you need?

vkou3• 5 years ago

Since so much is driven by identity, is there a service where you can rent out front people to "lead" the team that check the right boxes?

Yes, it's called stock photography. Buy a couple of pictures of smiling people from a peddler of it, and stick them on your website's 'About Us' section.

HashThis• 5 years ago

This makes OpenSea corrupt.

aresant• 5 years ago

The NFT community has been processing this news by changing their Twitter handles to Nate's with his imagined excuses and explanations ->

https://twitter.com/BoredPimp/status/1437989964680032264

https://twitter.com/nogoodlogan/status/1438014313722040322

https://twitter.com/Milkman2228/status/1437971018950250499

chejazi• 5 years ago

Oh man. This level of shame for someone not used to it (e.g. not a public figure) will certainly lead to some trauma.

space_rock11• 5 years ago

Criminals and scammers are not normally the sensitive types

brightball• 5 years ago

Just validates that the entire NFT concept is as ridiculous as it sounds.

ryanSrich• 5 years ago

How does potential insider trading in any way validate NFTs being ridiculous?

dreyfan• 5 years ago

Because it's all a sham and the monetary success of a particular drop is contingent upon how well it's advertised. By knowing when and what drops would be featured, that was the information asymmetry he was exploiting. There is nothing fundamentally useful about a single NFT so far. It's all speculative bullshit in every sense of the imagination. This is just the ICO scams of 2019 regurgitated [1].

[1] https://en.wikipedia.org/wiki/Greater_fool_theory

dcolkitt2• 5 years ago

Don’t you remember that time someone got caught insider trading stocks and it made everyone realize that the joint stock corporation was a bad idea.

SkyMarshal• 5 years ago

Most NFTs are technologically uninteresting for one reason or another.

Either the actual art exists off-chain somewhere and there’s just a hash of it onchain, which the “owner” controls with the private key of the transaction or contract the hash is in. But the art can still be copy-pasted all over the Internet and the only way to prevent rando’s from using it for free is with traditional copyright law, so it’s not actually decentralized.

Or the art itself is onchain but it’s just some avatar manually drawn in Microsoft Paint (cryptopunks I’m looking at you) and not pseudo-randomly procedurally generated in the smart contract or anything technologically novel and notable like that.

The concept of NFTs is interesting and may lead to something truly cool someday, but most of the implementations right now are trash.

Disclaimer - I haven't reviewed all the NFT implementations, there are too many. But if there are any that are fully on-chain, decentralized, have zero off-chain dependencies, and are artistically and/or technologically novel, then please let me know!

kobasa• 5 years ago

So one dummy who made like 15eth off a very fringe method AND GOT CAUGHT invalidates a whole new technology / asset class?

qeternity4• 5 years ago

The entire crypto world is like this.

MtGox pumping and wash trading with Willy bot. Bitmex trading against and liquidating customers. Coinbase hiring Litecoin creator Charlie Lee and having him frequently wash trading 99% of LTC volume. Each of these has been _the_ preeminent exchange at some point in time, just as OpenSea is for NFT.

FTX was born from one of if not the largest crypto trader/market maker, and one of two known Tether customers (who apparently account for a large majority of Tethers). Alameda was the only/largest liquidity provider on FTX for some time. Binance has been similarly accused (without solid proof) of trading against customers. Of course they claim to have walls between these relationships. But then again, so did Mt Gox, Bitmex, Coinbase, OpenSea and loads of others that would take too long to mention.

Crypto is a casino where there are a handful of dealers that are running thousands of tables. They are all colluding. The grift is to exchange real fiat currency for chips at their casino.

It has been proven at a shocking number of blue chip institutions (dare I say a majority). Given our expected likelihood of uncovering these things, it seems highly probable that it’s happening everywhere.

thebean117• 5 years ago

I wonder if this is actually unique to crypto, or if it's common in any industry where participants have a massive financial incentive to "cheat"? There's plenty of instances of hedge funds and stock traders acting like this. I bet there would be more if they were under as little regulation as the crypto exchanges..

qeternity4• 5 years ago

Well, I spent most of my career as a hedge fund trader so I can also comment on this: of course everyone is looking for the upper hand and people will bend or break rules to achieve this. But this is universal to all games, and fundamentally the game is fair.

In crypto, the game is not fair. The refs are players and there are no rules.

felixbraun2• 5 years ago

IMO people overestimate how much alpha is in knowing your customers’ positions (as exchange owner).

Open interest, volume and price data down to seconds is available via APIs in real-time, from which it is absolutely possible to build a model of positioning.

If you launch a new exchange, your biggest problem is lack of liquidity, meaning limit orders won’t fill ‘timely’ and market orders slip, which is very bad UX obviously.

That is why it is fairly obvious that one of the best market makers in the industry launched their own exchange; Alameda could provide excellent liquidity for FTX from day one.

qeternity4• 5 years ago

IMO people overestimate how much alpha is in knowing your customers’ positions (as exchange owner).

I’ll say this as respectfully as I can: you’re wrong. Aside from algos, positions are the most closely guarded information in trading. If you know someone’s positions, you might be able to assess what their risk tolerance and stops would be, and you can exploit that.

If you’re a crypto exchange with huge highly leveraged perpetuals trading, you don’t have to guess where the stops are: you know exactly where those positions will be liquidated. Hell, you built the system to execute the liquidations.

So you just run an algo (you don’t even need funds/margin because hell you’re the exchange) to whipsaw people around and trigger this liquidations while you profit massively.

Alex3917• 5 years ago

The entire crypto world is like this.

I've heard that there are a bunch of companies in the space paying their blockchain engineers minimum wage (when their salaries should have been at least 250k), and instead compensating them by letting them insider trade on their press releases. The reason the people in these cases rarely get fired when found out is that it's literally their compensation package.

skinnyasianboi• 5 years ago

The entire crypto world is not like this. Crypto is not all about making money.

aforwardslash3• 5 years ago

citation needed :)

d--b• 5 years ago

Anyone knows the legality of this? NFTs aren’t regulated, right? And OpenSea isn’t legally bound to act on its clients best interests?

dcolkitt2• 5 years ago

Not against the law at all. If market manipulation and insider trading of art was illegal half the gallery owners, collectors and critics in New York and London would be in jail.

Bad look for OpenSeas and unethical? Sure.

space_rock11• 5 years ago

You can't rig an auction. That's illegal. eBay can't trade in it's own items to get the prices higher

mekkkkkk2• 5 years ago

Anyone surprised by this must be living under a rock. NFTs and crypto in general has turned into mostly an unregulated playground for market manipulation.

It's sad to see these fantastic technologies falling into darkness. Same can be said about the majority of the internet and its phenomenon to be honest.

space_rock11• 5 years ago

I was agreeing with you until you said fantastic technology. Crypto has always involved outrageous fraudulent claims about the technology in its sales pitches. The technology they sell does not exist. Decentralised trading is still incomplete research. It's vaporware

zachmx• 5 years ago

Just curious, why do you say decentralized trading is incomplete research/vaporware? There are dozens of decentralized exchanges that are up and operating, including sites like Dydx and uniswap. Obviously these are still experimental, but they do work.

yokem55• 5 years ago

Care to explain why you think uniswap isn't decentralized trading? The contracts are immutable, 100% on chain, and can be interacted with without any help from the uniswap web site.

vineyardmike3• 5 years ago

While i vaguely agree, crypto/blockchain/whatever has one unique aspect that is "valuable":

It creates a scarcity in an internet full of abundance. You can copy/paste a JPEG or MP3 a million times (hello piracy), but you can't own an NFT or coin you don't actually own. Sure, you can copy/paste the underlying JPEG, but thats not the same. There will only be 1 blockchain owner.

This unique property of scarcity is a valuable property for financial products, in an obvious way. The issue is that an abundance of a scarce product is ripe for fraud. Oh, and of course there is no answer for the on-chain to in-IRL conversion for things like ownership.

mekkkkkk2• 5 years ago

Admittedly hyperbolic, though the tech I was referring to was blockchains in general. Maybe you know something I don't, but I always thought the idea and core of blockchains to be pretty rad.

Animats• 5 years ago

Not clear whether this is even illegal, though. As long as they refer to existing objects, they're not securities, and since they're all different, they're not commodities. So they escape both SEC and CFTC regulation in the US. (The UK's Financial Conduct Authority, though...) That's the whole point of NFTs.

In 2019-2020, the SEC cracked down on Initial Coin Offerings. They grandfathered in the early coins, and shut down some out and out scams. Then the SEC started sending out letters, "explain to us why your ICO isn't a security offering requiring registration as an IPO". Suddenly there was a huge drop in ICOs.

So then came NFTs, which looked like they were going to evade regulation. Then some of the NFT issuers started making NFTs which looked like IPOs. Selling land in virtual worlds that don't exist yet, for example. That's a no-no. That passes the Howey Test - value paid into a common enterprise, with the expectation of future gains, to be derived from the efforts of others. That's the definition of an investment in the US. If the value of an NFT depends on the future efforts of the organization involved with the NFT, it's a security.

That doesn't quite seem to be the case here, though. It's legal, and fairly common, for an art dealer to front-run artworks or have shill buyers. You're supposed to know what the art is worth.

Selling NFTs in bulk, though, might start to look like a security for regulation purposes. Selling fractional shares in NFTs definitely is. The SEC is working on a guidance memo. If you're starting up an NFT, you definitely need some time with a securities lawyer. Remember, the whole point of most NFTs is to try to evade securities regulation. That comes with serious legal risks.

[1] https://www.howeycoins.com

Y_Y• 5 years ago

What does "refer to existing objects" mean? Are these any better than baseball cards or top trumps?

vkou3• 5 years ago

I don't think 'refer to existing objects' is the meaningful bit, here. You can print and sell and trade and auction baseball cards of players that don't exist, and they'll still be regulated the same way as baseball cards of players who do. (Which is to say, not at all.)

I think the meaningful bit is whether or not an NFT is a baseball card, or ownership of... Some yet to be generated value, somehow derived from a baseball card.

The latter is obviously a security, the former is, to my layman eyes, probably not.

Continuing on this train of thought, it should be worth noting that useless things (Ownership of a baseball cards) are not regulated, but useful things (Ownership of a stake in the value generated by a baseball card) are regulated.

It makes sense, in a perverse way - if someone wants to spend their money on a useless thing, that's on them. If someone wants to spend their money on a useful thing, then, well, the buyer should expect some assurance that they are not being completely lied to and swindled. (Which is why the SEC regulates securities markets, and not art auctions.)

space_rock11• 5 years ago

Can eBay pump up the price of it's own items with fake trading bots? No that's fraud. There are laws around auctions and trading. I'm guessing it's illegal

unclebucknasty2• 5 years ago

The key here is disclosure. If eBay was transparent with its bot activity, then it may be legal.

npteljes• 5 years ago

Not clear whether this is even illegal, though.

I think it's not, and I wager this is what's attractive about crypto for these people. All the old tricks are new again, because crypto kinda works like how currencies, exchanges etc work, but the regulation is few and far between yet.

iblaine• 5 years ago

Reminds me of a situation where I worked at an affiliate network that tracked ads and commissions. Adsense was relatively new back then and I figured out how to match impressions to clicks to AdWords keywords to sales. You could approximate the ROI/click for keywords on Google and to some extent SEO. The reaction from upper management was excitement then fear that the tool would get out, which it eventually did. Surely this will be a learning experience for OpenSea. It does happen. Here's another example. [1]

[1] https://www.theatlantic.com/business/archive/2015/10/draftki...

alainchabat• 5 years ago

Author of https://project-memento.com here, this is a disapointing news to see as a NFT creators. NFT aren't shown equally on their website

xrd• 5 years ago

I just heard the podcast with this guy a few days ago: https://podcasts.google.com/feed/aHR0cHM6Ly9hbmNob3IuZm0vcy8...

It's crazy that a company like OpenSea, that is a massive success story in the space, can't keep an employee happy enough to wait for his riches to come.

There are so many fascinating and brilliant things happening in crypto but they get overshadowed by grifters like this.

OpenSea product chief accused of flipping NFTs with insider information

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