Most people think of insider trading as trading company stocks based on confidential or non-public information. However, insider trading also extends to the world of non-fungible tokens, or NFTs. Unfortunately, OpenSea discovered a case of insider trading by one of its employees.
OpenSea is a popular peer-to-peer marketplace for NFT trading. Former head of products Nate Chastain bought artwork shortly before he knew that OpenSea would feature the art pieces on the website’s front page. That action constituted a classic case of insider trading.
In response, OpenSea implemented policies that will prevent future insider trading incidents. The new policies prohibit employees from trading on non-public information. They also ban employees from buying or selling from featured collections that OpenSea promotes.
“This is incredibly disappointing,” said co-founder and CEO Devin Finzer. “We want to be clear that this behavior does not represent our values as a team. We are taking this very seriously and are conducting an immediate and thorough third-party review of this incident so that we have a full understanding of the facts and additional steps we need to take.”
How OpenSea Discovered Insider Trading
Ethereum blockchain crypo traders exposed the insider trading. NFTs are digital assets that are sold and traded on a blockchain. Most NFT transactions trade on the Ethereum blockchain.
Some crypto traders noticed an anonymous user bought NFTs that were then featured on the OpenSea’s home page. Once the price spiked, the same anonymous user sold the NFTs. The anonymous user made sizable profits, often in just a few hours.
One crypto trader looked at transaction records on the public blockchain then linked the NFT purchases and sales to Nate Chastain’s public wallet. The trader noticed the profits from these suspicious NFT trades went back to the same public wallet.
Some have interpreted the incident to mean NFT markets are geared toward speculation rather than artist support. “The fact that people are responding to this as insider trading shows that this is securities trading (or just gambling), not something designed to support artists,” argues Anil Dash, the CEO of the software company Glitch. “There are no similar public statements when artists get ripped off on the platform. If Etsy employees bought featured products from creators on their platform that’d be great. Nobody would balk. Because they’d be supporting their goal,” Dash further commented.
Devin Finzer and Alex Atallah founded OpenSea in 2017. Based in New York City, OpenSea has emerged as one of the most popular trading platforms for NFTs. In January 2022, OpenSea raised a $300 million funding round, valuing the startup at $13.3 billion. In July 2021, the value of the NFT platform equaled $1.5 billion. As a result of the latest valuation, Finzer and Atallah have become the world’s first NFT billionaires.
Many prominent crypto venture funds and exchange platforms are backing OpenSea. Backers include Andreessen Horowitz, Coinbase, Dapper Labs, Y Combinator, Founders Fund, and Blockchain Capital.
Fred Ehrsam is the managing partner of Paradigm, an investment firm that focuses on crypto and Web3 companies. He stated, “Devin and Alex have shown true grit over the last four years, weathering uncertainty and sticking to their vision of NFTs as an internet- and world-changing primitive.”
The company intends to use the money from its latest funding round to accelerate product development, grow its team, and improve customer service. Currently, OpenSea has around 70 employees. It is also looking for investment opportunities in the NFT and Web3 communities.
NFTs Entering the Mainstream
NFTs are becoming increasingly mainstreamed. Many celebrities, fashion labels, and other non-tech personalities are getting involved in the NFT space. For example, Paris Hilton recently collaborated with two female digital artists to launch an NFT collection. Ms. Hilton is also an investor in Origin Protocol, another NFT platform. Similarly, in late 2021, the luxury Italian fashion brand Dolce & Gabbana sold out its nine-piece collection of NFTs. The collection, titled Collezione Genesi, generated approximately $6 million.
News of eye-popping prices brought NFTs mainstream attention at the beginning of 2021. For example, Christie’s auction house sold NFT digital artwork “Everydays: The First 5000 Days” by digital artist Beeple for $69 million. In addition, NFT platforms like the Winklevoss twins’ Nifty Gateway attracted attention with NFT sales of high-end art.
As a result, many people stepped into the NFT game. Digital artists around the world became collectors and creators. Some people even shifted their career trajectories to immerse themselves in NFTs. For instance, Dani, a 27-year-old former fashion designer from Georgia, bought NFTs from the World of Women collection. She spent $17,000 to purchase the NFTs, and her portfolio is now worth around $715,000.
These external events set the stage for OpenSea’s success. OpenSea has advanced search features that make its website more user friendly than many of its competitors. It also has made NFT ownership a status symbol. When users purchase new NFTs on the Ethereum blockchain, the purchase history is displayed on OpenSea’s website.
As NFTs soared in popularity, many OpenSea users changed their Twitter profile pictures to an image of an NFT they owned. “It became this circular feedback loop, driven by envy and desire. And OpenSea really captured that market,” started Richard Chen, a partner at 1Confirmation, a venture capital firm.